Why ‘alternative’ real estate is now institutional
Alternative real estate categories have become increasingly prevalent in institutional property portfolios over the past five years – and that trend is continuing, a new report by bfinance has found.
According to the consultancy firm’s report, a number of fund managers and research houses are now highlighting this theme. It cited real estate investment firm Heitman, which it said has charted an increase in the proportion of alternative real estate in institutional portfolios from 5.5 per cent pre-pandemic to more than 13 per cent in late 2024.
Its own review of the US value-add fund segment places the target figure for alternative exposure at approximately 40 per cent for newer vintages.
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“In short: what was ‘alternative’ is now becoming more mainstream,” the report said.
The firm explained several reasons for this. Firstly, it said that the trend may be seen as an attempt to back winners.
“As highlighted in recent research by bfinance, the top performing US Core Diversified funds have averaged 11 per cent exposure to alternatives over the past five years, versus a mere 3 per cent for under-performers,” it said.
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Another reason is that asset managers are finding that the characteristics of some alternative sectors “can provide access to stabilised properties, durable cash flows, longer-term leases and strong credit quality”.
“Stabilised self-storage, medical office and cold storage properties can now be commonly found in core portfolios,” it said.
For investors looking to get more into this space, it said that more recently launched products tend to have a higher exposure to alternatives.
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It added that the geography is shifting – the US has led the development of the alternative real estate market to date, but there is “strong momentum behind this theme in Europe and, to a lesser extent, Asia”.
“As these markets mature, investors’ exposure to lower risk, stabilised institutional assets under the ‘alternatives’ banner is rapidly increasing,” the report said.
