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The listed real estate sector provides an attractive home for fast-developing alternatives businesses

By 2020, investors in European real estate will be allocating up to one-quarter of their acquisition budgets to the ‘alternative’ property sectors that they most probably would never have considered a decade ago.

Christian Hepp

Christian Hepp joined JLL in late 2014 and heads the EMEA Corporate Finance team. He has significant experience as a former banker, advising on capital raising, IPOs, M&A and restructurings. He arrived at JLL from J.P. Morgan’s Real Estate investment banking team, where he focused on the German and Benelux markets.

This projection is based on the long-term prospects that we at JLL see for alternative real estate, a range of specialist properties that fall outside mainstream markets such as office, retail and logistics. It is a sector that JLL knows extremely well, having one of the largest alternatives practices in Europe for advising on transactions, leveraging deep sector knowledge as a consultancy and providing strategic boardroom-level counsel and transactional advice out of one hand.
A rich array of opportunities has opened up for real estate investors in the alternatives space. Driving them are the secular trends resulting from technological or societal change that are significantly altering how we use real estate today, often highlighting that the existing stock is no longer fit for purpose. Students in the UK today would be amazed at the standard of accommodation their parents lived in during their university years, for example.
Clients’ lifecycle and sociographic changes are the key drivers for the evolution of these sectors with living-focused products (student housing and private rental apartments as well as serviced apartments, healthcare and more) playing a pivotal role. To these well-known examples of ‘alternatives’, we would add sectors such as self-storage, data centres and parking, amongst others. There are plenty of alternative sectors and the infographic highlights where JLL’s specialist teams place them in the spectrum of maturity.
Last year, alternatives accounted for 15% of Europe’s EUR 271 billion of real estate transactions, up from an 8% share in 2008.
The rise and rise of alternatives in Europe
Source: RCA, JLL
With an attractive combination of fundamental growth projections, stable income and property-level pricing discounts compared with traditional sectors, the listed market provides a highly attractive home for companies focusing on alternative asset classes. While these niche and fragmented markets currently still lack scale, there are substantial opportunities for those able to act as market consolidators and grow their platforms, through organic as well as acquisitive growth.
Based on these expectations, alternative valuations are currently outperforming their mainstream competitors, as is outlined in the infographic below:
Source: THOMSON REUTERS EIKON
The importance of the listed sector is one of the key reasons that prompted JLL to bring in EPRA’s former CEO, Philip Charls, as a senior advisor to the business with a view to further enhancing JLL’s advisory capabilities in the field.
Last year, the share price movement and dividend from a UK alternative sector REIT generated a 12.7% return for investors, whereas UK REITs as a whole generated a lower total return of 8%.
The low-interest rate environment has certainly put such returns into focus for investors. However, at JLL we regard the rise of alternatives as a long-term structural shift: real estate is being separated from the underlying specialist service or function provided inside the buildings by the occupier – the ‘op co/prop co’ division that private equity, in particular, has applied to large companies in creating value.
The UK pioneered the development in Europe of purpose-built student housing (PBSA), one of these alternative sectors that JLL has accompanied from its outset to its current status as a well-established sector. It has flourished as students demand better and professionally managed accommodation, which has been amplified by the rise of studying abroad. Student housing is one of the success stories of alternatives in Europe and the lessons from the mature UK market have helped the sector to grow across the continent.
Recent investment activity in Europe shows that PBSA is an established asset class that attracts sovereign wealth funds and other institutional investors as well as a healthy family of listed companies. It has, to all intents and purposes, become mainstream. As other sectors reach a similar stage of maturity, we will inevitably reach a point when we will have to drop the moniker ‘alternatives’ when we talk about these emerging real estate sectors.
If you wish to find out more about JLL’s capabilities in the alternatives sector, please contact us:
Christian Hepp, Head of M&A, EMEA
+44 207 087 5197
Christian.Hepp@eu.jll.com
Ollie Saunders
Lead Director, EMEA Alternatives
+44 207 087 5843
Ollie.Saunders@eu.jll.coml.com