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The 2020s – The Rise of ‘Alternative’ Real Estate Investments?

Suzi Carter, a Chartered Surveyor with 25 years’ experience in the commercial and residential property sectors, comments

In February’s edition I talked about how niching could be the way to gain a competitive advantage for your commercial property investing in 2021. Niching can be done geographically or by sector (or both), and it is the latter that I'd like to explore further in this edition. I think there are some incredible opportunities on the horizon, for canny investors, arising from current (and future) market conditions.

So just to recap, traditionally, investment in UK commercial property has been in the three main ‘sectors’ - namely retail, offices and industrial. Investors have consistently stuck to these types of investment because they have had all the essentials that facilitate secure institutional-grade income - including solid tenant covenants, long leases, upward-only rent reviews and full repairing and insuring leases. As a result, they have provided ‘guaranteed’ longer term income. These types of investments have therefore generally been proven to be liquid in the market, due to the weight of demand from both UK and overseas investors.

Other, alternative (or ‘alt’), sectors have emerged over recent years but have been less popular, and generally less sophisticated markets, than the ‘Big 3’. These ‘alt’ sectors have included purpose-built student accommodation (PBSA), leisure property, hotels, build to rent, amongst others.

However, one major asset class is no longer proving as attractive to institutional investors and this, of course, is retail – especially large retail schemes such as shopping centres and retail parks. As a result, many institutional funds are reducing their exposure to such assets (they are trying to sell) and looking to re-allocate the funds.

Coupled with this, lease lengths are generally decreasing across-the-board, certainly on offices and retail properties, and lease terms are changing to include more flexible lease structures, break clauses and turnover rents. These changes in the more traditional commercial property sectors are meaning that investors are looking to cast their net wider to invest in other types of real estate in order to diversify their portfolios, reduce risk and earn better returns.

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