Institutional real estate investments are a part of the alternatives real estate investment universe. It is only recently the sector has become mainstream with an increasing number of ways to invest in real estate by retail investors and the prominence of real estate private equity funds in private real estate space. Most real estate investors are still represented by insurance companies, trusts, and wealthy families. The world’s largest professional real estate fund managers reflect this with private equity behemoths like Blackstone and Brookfield.
The asset class is always associated with commercial real estate asset classes like office, retail and industrial assets. But there is a broader range of investable assets in real estate, and the fastest-growing segment is the real estate alternatives.
Institutional real estate funds or REITs will have allocation to these assets, but they are not the industry’s bread and butter. Another vector of looking at the alternative risk profile can range from core, core plus real estate to value add strategies.
Alternative Real Estate Sectors
The difference between traditional and alternative real estate investments is the relatively heavier degree of the operational aspect of managing the assets, which is not required of the conventional assets. In the alternatives area, the operator’s ownership is just as important as the real estate, which ultimately limits the selection of quality investable assets.
The list of alternative real estate sectors below shows the commercial real estate sector’s breadth, but not all are available for everyday investors. We also only focused on the equity side, but we highlighted some alternative real estate debt strategies in this area elsewhere.
Purpose-Built Student Accommodation (PBSA)
Student housing covers the ownership and operation of student accommodation. PBSA assets specifically target university students, and the sector has recently become more mainstream with the entrance of operators backed by quality institutions.
Unfortunately, there is no easy way for retail investors to gain exposure to the sector as the operator’s ownership is closely linked to the underlying property.
Fast Food Standalone Sites
Retail pad sites are separate blocks of land occupied by drive-through retail, fast-food chain or a standalone retail store. The most common of these are fast-food chains like McDonald’s or KFC sites, but the sub-sector refers to any fast food operator of quality. The key distinction of a retail pad site is that it is being leased to a blue-chip operator.
The main attractiveness of investing in a retail pad site is the limited requirement of hands-on management. The leases themselves are typically triple net leases where the operator pays the outgoing expenses and upkeep capital expenditure. There aren’t many requirements on the landlord, and because of this, it is highly sought after by high net wealth investors.
Typical characteristics of a retail pad site are the property’s value is usually in the range of $2 to $5 million. The long-term value site value will revert to the land value as the leases run off but given the site’s location, there is always a strong chance the operator will renew their lease at the end of the current term.
Petrol Stations Investments
A sub-sector in the retail pad site space is gas stations. We are always averse to these sites due to potential contamination risks and the limited alternative use for the site if the petrol station operator vacates the premises at the end of the lease.
Childcare Center Investment (Social Infrastructure)
Childcare operators are another set of tenants that will enter into long term leases, and similar to retail pad sites, some childcare centers can also be bought by themselves. It is important to note that not all child care operator covenants are the same and due diligence on the operator’s quality is just as important as the real estate.
Senior housing covers the purpose-built retirement villages where the target tenants’ profile is above a specific age range.
Self-storage assets have been around for a long time. The market is highly segmented, where mom and pop owner/operators make up a large portion of the market. Institutional presence in the sector is still low compared to the mainstream asset classes.
Manufactured housing is a modern term for trailer parks. Trailer parks own the land and lease the land and the manufactured housing above the ground. In other instances, tenants in most instances own the house but not the land. In addition to this, there is an aspect of tourism as a result of seasonal demand.