Diversity: Alternative real estate investments investors should watch

One of the most exciting things about the real estate investment market is its diversity. Some private investors opt for the simplicity of an oven-ready office block with a grade-A covenant, while others prefer a more involved project or something that resonates with their own interests. For the latter, we asked our teams around the world to nominate some ideas.

Farming carbon

As we mentioned earlier, environmental, social and governance (ESG) is now a driving force in the property investment sector, but the role of agricultural land in tackling climate change is often overlooked by those not familiar with the industry. Once just seen as somewhere to produce food, farmland is becoming multi-functional, with the potential to deliver a whole range of public goods from flood mitigation to enhancing mental health.

However, the big win is the opportunity to sequester carbon as part of the battle against climate change. This doesn’t mean stopping farming completely or planting lots of trees (although that in itself is a great opportunity), but farming in different ways. Tom Heathcote, our Head of Agri-Consultancy in the UK, for example, is increasingly talking to his clients about the benefits of regenerative agriculture.

By farming more sustainably carbon is locked into the soil, something that a growing number of schemes are starting to measure and reward. It is still a nascent market, but there will be huge opportunities around the world (Africa is already a focus) coming on stream very soon as investment funds become involved, says Tom.

Older offices

Despite the Covid-19-induced virtual state of suspended animation that has driven office leasing volumes to record low levels as businesses reassess their occupational strategies, record rents have still been achieved throughout the pandemic for the very best offices in top-flight cities such as London.

As Faisal Durrani, who heads our London Commercial Research team, explains, this behaviour has been fuelled by a shortage of best-in-class office space and a restricted development pipeline.

With 64% of office stock in London completed prior to 2000, excluding refurbishments over the past 20 years, the proportion of buildings that is of the quality occupiers want is limited. And he anticipates an intensification in competition around this segment of the market.

The question is, will there be any relief from the limited availability of prime space? The answer, says Faisal, is “probably not”. In fact, only around 12% of the speculative development pipeline is likely to be delivered to the original programme.

Given the laser-sharp focus on the best offices by businesses, one of the greatest – and more affordable – opportunities for private investors in the London market lies in the 64% of stock built before 2000, reckons Faisal, specifically older, “tired” buildings.

Although he says this may seem counter-intuitive, by refurbishing or repositioning these assets to a new, modern sustainable standard, demand for space within previously passed-over stock can be reinvigorated, while at the same time saving these buildings from a long road to obsolescence, or perhaps even a change of use.

Indeed, new minimum energy efficiency standards proposed by the UK government for all commercial buildings in England and Wales by 2030 serve to highlight the criticality of what’s at stake: the proverbial shelf-life of a building.

Park life

Already of growing interest in his native Australia (and the US and UK) prior to the pandemic, Kevin Coppel, Head of our Asia- Pacific network, believes Covid-19 will only enhance the attractiveness of trailer parks (which are becoming increasingly high-end) as more people look for an affordable bolthole in the country.

In February, prior to the pandemic, the Financial Times ran a story headed “Why big investors are buying up American trailer parks”. As an investment, they are usually highly cash generative with consistent (often cash) income, limited capex and low operating costs.

Locations that attract a mix of occupiers provide stable income streams from long- term tenants and relatively premium rents for holiday stays. In addition, their location, often on the fringes of regional towns, can also offer “land banking” for future development opportunities.

Mass media

A final thought from Dr Lee Elliott, our Head of Occupier Research, who says studio space could be at a premium given the rise of so-called techtainment giants like Netflix and Amazon Prime that are not just streaming other people’s content, but creating vast swathes of their own. As he points out, it’s a trend that can play to either office or industrial assets.