Abstract
The alternate real estate sectors (including healthcare, data centres, self-storage, university student accommodation and infrastructure) have taken on increased importance in recent years with institutional investors, as they have sought to broaden their real estate sector exposure. This has been driven by key real estate investment factors, including the changing global demographics, advances in technology and the impact of COVID-19. Importantly, this trend is expected to continue and has a major influence on real estate management and strategies by institutional investors going forward. Using a range of alternate real estate sectors across several countries (US, UK and globally) in the direct, non-listed and listed real estate spaces, this paper examines the risk-adjusted performance and portfolio diversification benefits of these alternate real estate sectors compared to the standard asset classes in the portfolios of institutional investors. The real estate management and strategic implications for institutional investors going forward are also assessed.
Keywords
Introduction
Traditionally, institutional investors (e.g. pension funds, insurance companies and sovereign wealth funds) have used a number of portfolio management procedures, both across and within asset classes, to deliver their investment performance and inform their investment strategies. For real estate, they have largely focused on the prime office, retail and industrial real estate sectors to get real estate exposure in their portfolios. This has been achieved by a variety of real estate investment structures and channels such as direct real estate, non-listed real estate funds, joint ventures (JVs), club deals, separate accounts, fund of funds and Real Estate Investment Trusts (REITs). This has provided high-quality real estate exposure in both the domestic and international real estate markets, using both non-listed and listed real estate products. The main drivers for this real estate strategy have been strong returns, portfolio diversification benefits, attractive yields and exposure to top quality real estate investment managers.
This sees institutional real estate investors having over $1.5 T in real estate investments, typically accounting for approximately 5–10% of their overall portfolios (IPE, 2021b). Leading real estate investors amongst the institutional investors include Allianz, APG (Algemene Pensioen Groep), CIC (China Investment Corporation), ADIA (Abu Dhabi Investment Authority), AXA, Swiss Life, CPPIB (Canada Pension Plan Investment Board), CalPERS (California Public Employees Retirement System), GIC (Government of Singapore Investment Corporation) and NPS (National Pension Service), comprising pension funds, insurance companies and sovereign wealth funds across the US, Europe, Asia-Pacific and the Middle East (IPE, 2021b). Leading real estate investment managers, such as Blackstone, Brookfield, PGIM (formerly Prudential Investment Management), Nuveen and CBRE Global Investors, have met this institutional investor demand using a range of real estate investment vehicles in both the non-listed and listed real estate spaces (IPE, 2021a).
More recently, with the strong investor interest and intense competition in the prime commercial real estate sectors by both local and international real estate investors, institutional investors have also considered expanding the scope of their real estate investment portfolios to include the alternate real estate sectors. This includes healthcare, data centres, self-storage, student accommodation and infrastructure, as well as agriculture, Build-To-Rent housing, co-living accommodation, car parking, childcare centres, cold storage, petrol stations, pubs and convenience retail. This has been driven by factors such as changing global demographics, advances in technology, need for improved social infrastructure, transition to green economies and the impact of COVID-19. Often, these drivers for the alternate real estate sectors are less cyclical and less strongly linked to the typical real estate drivers for the core real estate sectors which are more strongly linked to economic factors (Zenith Investment Partners, 2020). Going forward, these alternate real estate sectors are expected to play a more prominent role in institutional investors’ real estate portfolios, as they seek to diversify and future-proof their real estate portfolios. Major institutional investors are also increasing their strategic allocation to real estate in their portfolios in the near future (e.g., CalPERS; 13%–15% allocation in 2023); largely via real estate funds and co-investments.
This sets an important context for real estate investment strategies by institutional investors going forward. The key research questions in this paper are how these alternate real estate sectors compare in their performance to the other major asset classes and what strategies are available to institutional investors going forward to increase their exposure in this alternate real estate space. As such, the ranges of alternate real estate sectors considered in this paper are the following: • Healthcare: UK; direct real estate; over 1999–2020. • Data centres: US; listed real estate (REITs); over 2016–2021. • Self-storage: US; listed real estate (REITs); over 1994–2021. • University student accommodation: UK; direct real estate; over 2011–2020. • Infrastructure: global; direct real estate; over 2008–2021.
With these risk-adjusted performance analyses being conducted for the US (data centres and self-storage), UK (healthcare and university student accommodation) and globally (infrastructure) in either the direct, non-listed and listed real estate spaces, as well as across different time periods to reflect the robustness of the performance of these alternate real estate sectors in different environments and real estate investment structures/channels. This paper examines the risk-adjusted performance and portfolio diversification benefits of these alternate real estate sectors compared to the standard asset classes in the portfolios of institutional investors, as well as the identification of the key drivers that will take on increased importance in the future. This empirical performance analysis is also supported by the strategic practical implications for institutional investors concerning the added-value and increasing role of the alternate real estate sectors in institutional investor portfolios expected to be seen in future years.
As such, this paper goes beyond just presenting an analysis using 10-year forecasts of the alternate real estate sectors, to more fully highlighting the historic performance of a range of alternate real estate sectors, their role in a real estate portfolio for institutional investors and clearly articulating the ongoing drivers for the continued importance of these alternate real estate sectors for institutional investors.
Importantly, the practical implications of this research for managers see a strong empirical analysis that reinforces the risk-adjusted investment performance of these alternate real estate sectors and their positive role in a mixed-asset portfolio, as well as the identification of clear positive drivers for these alternate real estate sectors going forward (e.g. demographics, technology, environmental transitions and impact of COVID). This is expected to see increased institutional investor acceptance of the alternate real estate sectors due to their added-value characteristics and the opportunity to see more diverse and future-proofed real estate portfolios that go beyond the previous real estate portfolios, which typically only included exposure to prime real estate assets in the office, retail and industrial sectors. This is particularly important as pension funds take on an increasing importance for the financial and social well-being of their stakeholders, with ESG (Environment, Social, Governance) considerations becoming increasingly important for many stakeholders. The asset allocation process in delivering return performance is crucial, with the potential role of these alternate real estate sectors within the pension fund’s real estate exposure being an opportunity for enhanced returns beyond that achieved by the traditional real estate sectors. A key challenge for managers is how to access these alternate real estate sectors (and traditional real estate sectors) in an effective manner.
The subsequent sections of this paper are structured as follows: the next section presents the institutional investor context for real estate and infrastructure, with the following sections presenting a review of the alternate real estate sectors, presenting the literature review, presenting the methodology, presenting the performance analysis results and discussion, presenting the practical implications for managers and the final section presents the conclusion.
Institutional investors and real estate/infrastructure
Leading real estate investors: 2021.
Source: Authors’ compilation from IPE (2021b).
Leading real estate investment managers: 2021.
Source: Authors’ compilation from IPE (2021a).
In several cases, these real estate investment managers are already active in the alternate real estate space via impact investing. This includes the healthcare sector (e.g. Harrison Street, Primonial, AXA, Keppel and AEW) and student accommodation (e.g. Greystar, Harrison Street, Brookfield, Blackstone, Mapletree and Heitman), as well as active and significant REIT sectors in the alternate real estate space in the US etc., (e.g. healthcare, self-storage and data centres).
Leading infrastructure investors: 2021.
Source: Authors’ compilation from IPE (2021d).
Leading infrastructure investment managers: 2021.
Source: Authors’ compilation from IPE (2021c).
Review of the alternate real estate sectors
The following section reviews each of the alternate real estate sectors considered in this paper; being healthcare, data centres, self-storage, university student accommodation and infrastructure. The selection of these alternate real estate sectors for analysis is driven by the key alternate real estate sectors supported by institutional investors and performance data availability. In many cases, performance indices are not yet available for some of these specialised alternate real estate sectors, particularly for direct real estate exposure. These five alternate real estate sectors form the basis for the empirical analysis to be carried out in subsequent sections of this paper; including both non-listed and listed real estates.
Healthcare real estate
Healthcare real estate is an important alternate real estate sector, and it is a fundamental part of the social infrastructure needed in our society today. Typically, the healthcare sector is strongly supported by governments, as it is an essential part of the well-being of our communities. The underlying real estate assets to support this sector are important to facilitate high-quality medical services.
Driven by the ageing population demographic, this sees strong social, real estate and investor perspectives to healthcare real estate internationally. This includes the US, the UK and Australia, as well as Europe. Driven by these ageing population demographics and other healthcare sector-specific factors, this sees an important opportunity for institutional investors (e.g. pension funds) to be more actively involved in investing in healthcare real estate. These opportunities are across the primary, secondary and tertiary healthcare sectors, including general practice, hospitals, care homes and specialist service facilities. Key drivers for healthcare real estate investment have been the ageing population demographics, impact of our modern lifestyles, lack of suitable healthcare accommodation, advances in medical technology, need for modern medical centres, long leases for professional healthcare operators, indexed rental income, increased expectations of baby boomers in healthcare services, highly regulated industry and the role of both government and the private sector (Newell and Marzuki, 2018a). Whilst there are both real estate-specific and healthcare industry risk factors that investors need to be aware of, the healthcare real estate sector provides an excellent opportunity for institutional investors to be involved in delivering both performance and community benefits. A number of institutional investors are already involved in this space (e.g. CPPIB and EPF [Employees Provident Fund]).
This has seen many real estate investment managers actively involved in the healthcare space, in establishing both non-listed and listed real estate vehicles. In the non-listed real estate space, this includes LaSalle, Blackstone, M&G, Harrison Street, Keppel and Blackrock. Also, healthcare REITs have been established in nine countries, including the US, the UK, Australia, France and Japan. For example, in the US, the healthcare REIT sector has 16 healthcare REITs and accounts for 8.5% of the overall REIT sector market cap, being the sixth largest REIT sub-sector (e.g. Welltower, Ventas and Healthpeak Properties) (NAREIT, 2021). Figure 1 provides examples of healthcare real estate assets that are in these portfolios. Examples of healthcare investment properties.
The stature of the healthcare real estate sector is such that MSCI (a major international investment performance index provider) produces healthcare real estate performance indices in several countries (e.g. the UK, France and Australia). The MSCI benchmark performance index for UK healthcare real estate is used in this paper. For fuller details of the healthcare real estate landscape, including drivers, risk factors, real estate investors and real estate investment managers, see Newell and Marzuki (2018a).
Overall, healthcare real estate is an important alternate real estate sector, with strong real estate and social infrastructure drivers to see it as an attractive alternate real estate sector for institutional investors in their real estate portfolios.
Data centres
Data centres are a rapidly expanding alternate real estate sector, taking advantage of the growth in information technology (IT)-related infrastructure and increased technological requirements by business and communities today. The reliance on IT, supported by the improving reliability of IT-related services and infrastructure (e.g. broadband penetration rate and high-speed broadband connections), over the last 10 years has driven the growth in technology-focused real estate assets, such as data centres. The advances in technology in recent years in the areas of artificial intelligence (AI), internet of things (IoT) (e.g. smart devices and home automation), cloud computing (e.g. Amazon Web Services, Google Cloud and Microsoft Azure), e-retailing (e.g. Amazon, eBay and Alibaba) and media content delivery (e.g. Netflix and YouTube) services impose major challenges; one of which is data storage. The relevance of data centres utilising modern, cloud-based technology makes it an attractive alternate real estate investment opportunity for institutional investors, driven by these advances in technology. This sees data centres as a specialised real estate asset, equipped with an integrated framework of networking, processing and data storing equipment, where uninterrupted operation is essential for effective delivery. This is essential in a both a business and community context.
In addition to the technology drivers for data centres, the trend to work from home during the COVID pandemic has seen a further increased reliance on effective technology globally in both business and home environments. However, there is a clear risk of obsolescence due to rapidly changing technology advances that need to be factored into any data centre investment decisions by institutional investors, due to limited alternate use options for this space. Other operational risks include energy costs and high-power requirements in both developed and emerging markets.
Importantly, real estate investment managers have established both non-listed and listed real estate channels for institutional investors to access data centre investment opportunities. Major players in this space have set up data centre investment opportunities, often with significant multi-country portfolios to deliver geographic diversification benefits to their portfolios. For example, Keppel in Singapore has established a non-listed data centre fund comprising twenty data centres across eight countries, with data centre assets of $3 B. Other players such as Mapletree, SEGRO, Brookfield and AXA are also involved in data centre investment management and development.
In the listed real estate space, REITs in several countries (e.g. US, Australia and Singapore) have been particularly active in establishing data centre portfolios. For example, the US data centre REIT sector sees four data centre REITs established, accounting for $127 billion in assets and accounting to 8.9% of the overall US REIT market, being the fifth largest US REIT sector (NAREIT, 2021). These REITs include Equinix (fourth largest US REIT; 237 data centres across 27 countries), Digital Realty (seventh largest US REIT; 280 data centres across 26 countries), CyrusOne (40 data centres across five countries) and CoreSite (24 data centres in the US).
Figure 2 provides examples of data centres in these various data centre portfolios. No direct data centre performance series is currently available. As such, this paper uses the US data centre REIT index to assess their performance as an alternate real estate sector in the listed real estate space. For fuller details of the data centre investment space, see Marzuki and Newell (2019). Examples of data centre investment properties.
Overall, data centres as an alternate real estate sector have strong drivers from advances in technology and the potential to add-value in an institutional investor’s real estate portfolio. Strong investor demand is evident globally for data centre investment opportunities (CBRE, 2022a).
Self-storage real estate
Self-storage real estate is another alternate real estate sector that has attracted considerable attention recently. This has been driven by working from home pressures on family space during COVID, and de-cluttering, as well as an increased demand from many organisations for storing inventory off-site for e-commerce and home businesses.
This has seen the self-storage sector move rapidly from being a ‘small’ investor space to a large institutional investor space, seeing self-storage REIT markets established in the US, the UK, Europe and Australia. This now sees over 16 self-storage REITs globally, with the major markets being the US (e.g. Public Storage, Extra Space Storage, CubeSmart and Life Storage), the UK (e.g. Big Yellow, Safestore and Lock n Store), Australia (e.g. Abacus and National Storage) and Europe (e.g. Shurgard Self Storage). Often this has been achieved by a real estate investment manager linking with a self-storage operator. Most of this self-storage investment activity has been through the listed real estate channel, rather than the non-listed real estate channel. This makes self-storage REITs attractive to small institutional investors due to their enhanced liquidity.
The US self-storage REIT market is the largest globally, with six self-storage REITs and a market cap of $98 billion; being 6.9% of the overall US REIT market (NAREIT, 2021). These self-storage REITs include significant self-storage facility portfolios; in several cases, having over 1000 self-storage facilities. This sees some of these self-storage REITs being amongst the largest US REITs; for example, Public Storage (fifth largest US REIT) and Extra Space Storage (15th largest US REIT). Importantly, this provides portfolio scale and regional diversification for this market; these being key factors in institutional investor considerations. Figure 3 provides examples of self-storage facilities in these REIT portfolios. Examples of self-storage investment properties.
Overall, self-storage is another alternate real estate sector with strong drivers from both a business and home perspective. This sees the self-storage sector as an investment opportunity; particularly for smaller institutional investors needing liquidity in their real estate portfolio.
University student accommodation
The growth in the international university student education market has facilitated the growth in the student accommodation sector globally. For example, in the UK, there are over 500,000 international university students; accounting for 20.7% of the university student cohort (Universities UK, 2021). Similarly, in the US, there are over one million international university students, being 20% of the US university student cohort and having increased by 59% over the last 10 years. The main countries in this international student cohort are China, India, South Korea, Canada and Saudi Arabia. This high level of international students seeking university accommodation has been a key driver in this alternate real estate sector’s growth. Domestic students seeking high-quality university student accommodation is also an important factor.
In addition to these increased international student numbers, there have been a number of drivers behind this growth in university student accommodation investor demand; these include supply/demand imbalance, regulatory changes, reduced role by universities in providing student accommodation, long-term leases for operators, attractive yields, low risk, steady income stream, resilience against market downturn, geographically diversified portfolios, increased role of regional markets versus main cities, professional operator platforms, low vacancy rates, fewer structural challenges than other real estate sectors and the need for international market ‘brand’ by operators (Newell and Marzuki, 2018b). All of these factors have contributed to a high level of investor demand for university student accommodation. While there are clearly risk factors involved, such as the impact of currency fluctuations on students’ ability to pay fees, impact of technology to see an increased role for online education versus on-campus study, the biggest risk factor recently has been the impact of COVID on international student numbers where international travel to the student study locations was not possible. This impacted most markets which are now in the process of recovering from this COVID impact.
This environment has contributed to an increased investor acceptance of university student accommodation as an alternate real estate sector. This has seen leading real estate investment managers acquiring substantial student accommodation portfolios (often as purpose-built student accommodation [PBSA]) and setting these up via both non-listed and listed real estate vehicles. This includes Blackstone, Principal, Mapletree, Corestate, Hines, AXA, Allianz, Harrison Street, LaSalle, Brookfield, Greystar, CBRE Global Investors, M&G and Heitman in the non-listed real estate space. These were supported by university student accommodation REITs in the US (e.g. American Campus Communities and Education Realty) and UK (e.g. GCP [Gravitas Capital Partners] Student Living and Unite).
This was matched by a high level of institutional investor demand for investing in student accommodation, with leading players including GIC, CPPIB, APG, PGGM, Temasek and Bouwinvest. This often saw multi-country university student accommodation portfolios established, with strong links to professional operators in this area. Importantly, investors saw university student accommodation as different to residential real estate in their portfolios. Figure 4 provides examples of university student accommodation in these portfolios. For fuller details on university student accommodation investment dynamics, see Newell and Marzuki (2018b). Examples of student accommodation investment properties.
A UK direct university student accommodation performance index is produced by CBRE (CBRE, 2021). This CBRE index is used in assessing the performance of UK university student accommodation in this paper.
Overall, university student accommodation has been a well-supported alternate real estate sector for institutional investor exposure to this important sector which is seen as different to just adding to the institutional investor’s residential exposure.
Infrastructure
High-quality infrastructure is an important element for the social well-being and economic well-being in both developed and developing countries. This will take on increased importance going forward as social infrastructure is improved (e.g. healthcare facilities) and infrastructure transitions to greener formats such as renewable energy. Importantly, infrastructure is a good fit for institutional investors such as pension funds, as they have investment characteristics which match the long-term liability-driven investment strategies for institutional investors. Whilst traditionally covering the sub-sectors of power, water, transport and communications, an increasing focus over the next 10 years will be on renewable energy with a transition to a greener economy. This presents an excellent opportunity for institutional investors to clearly demonstrate their commitment to ESG (Environment, Social, Governance) to match the increased emphasis on ESG by their stakeholders.
This has seen a number of significant infrastructure players establish non-listed infrastructure funds. This includes Blackstone, Brookfield, GIP, Stonepeak, EQT and KKR. These infrastructure funds have been actively supported by institutional investors globally; this includes Allianz, CPPIB, NPS, CDPQ, OMERS, APG, PGGM, AXA, CalPERS, CalSTRS, ATP (Arbejdmarkedets Tillaegspension), CIC and AustralianSuper.
Infrastructure REITs have also played a key role for institutional investors seeking infrastructure exposure in a more liquid format. For example, US infrastructure REITs have significant communication site portfolios, with over 200,000 communication towers across over 22 countries globally. These US infrastructure REITs include American Tower, Crown Castle International and SBA. This appetite for communications infrastructure is clearly driven by an increased appetite for communication technology at all levels. Overall, US infrastructure REITs account for over $234 billion in market cap and are 16% of the overall US REIT market, being some of the largest US REITs (e.g. American Tower [#1], Crown Castle International [#3] and SBA [#8]) (NAREIT, 2021).
As well as non-listed infrastructure funds and infrastructure REITs, institutional investors often invest directly in infrastructure via JVs; particularly the larger institution investors, to get stronger control over infrastructure projects. Figure 5 provides examples of infrastructure projects that are included in these portfolios. For fuller details of infrastructure investment dynamics, see Marzuki and Newell (2021). Examples of infrastructure investment properties.
The MSCI global infrastructure index (MSCI, 2021b) is used for the empirical analyses in this paper, with performance details available at an individual asset level.
Institutional investors have strongly favoured infrastructure because of its attractive investment features. Whilst this has largely been in the traditional infrastructure sectors, going forward, this will see more opportunities for infrastructure investment by institutional investors in renewable energy infrastructure to meet their ESG mandates and concerns by their stakeholders.
Overall, these five alternate real estate sectors see considerable upside and longer-term attraction to institutional investors as important new sectors for their real estate portfolio, in addition to the high-quality office, retail and industrial real estate assets already in their portfolios. This is supported by strong drivers in these various alternate real estate sectors, with these drivers being structural changes in how we do business and how we live. The following sections will do a risk-adjusted empirical analysis to assess their performance in recent years and validate their potential added-value roles in institutional investor portfolios via both the non-listed real estate and listed real estate channels.
Literature review
Institutional investor strategies for real estate exposure
As shown above, this strong institutional investor involvement with real estate in their portfolios has seen a wide range of papers on institutional investor real estate portfolio management and decision-making over the last 30 years; particularly for US pension funds. This includes Farragher and Kleiman, 1994; Farragher and Savage, 2018; Hutcheson and Newell, 2018; Louargand, 1997; Newell, 2008; Reddy et al., 2014; Webb, 1984; Webb and McIntosh, 1982; Worzala and Bajtelsmit, 1997. However, much of this research is not in the current environment of real estate decision-making in institutional investor portfolios and effective strategies with the range of real estate investment opportunities available today, and not going beyond the previous typical real estate strategies of only considering prime office, retail and industrial real estate. Of the more recent research concerning institutional investor strategies, only Hutcheson and Newell (2018) considered strategic decision-making, selection of external fund managers, investment style, real estate vehicle and property type.
A recent focus in non-listed real estate fund management research has been the role of investment style; particularly the effectiveness of core versus value-add versus opportunity real estate funds (e.g. Bollinger and Pagliari, 2019; Fisher and Hartzell, 2016; Gang et al., 2020; Pagliari, 2020; Shilling and Wurtzebach, 2012). This research has often seen the lesser performance of value-add and opportunity real estate, relative to core real estate.
General alternate real estate
A number of papers have reviewed the alternate real estate sectors, their features and their potential role in institutional investor portfolios (e.g. Investment Property Forum (IPF), 2015; McIntosh et al., 2017; Newell, 2008). These papers covered the general features of the alternate real estate sectors and do not reflect the fuller range of alternate real estate sectors today, with limited empirical performance analysis; and largely focused on the listed real estate space.
Healthcare real estate
Limited research has been carried out on healthcare real estate; largely being US-based and appearing in both the real estate and healthcare management journals. This has included various healthcare issues concerning healthcare REITs (e.g. Brau and Heywood, 2008; Newell and Peng, 2006; Terris and Myer, 1995), healthcare real estate investment (e.g. Marzuki and Newell, 2022; Newell and Marzuki, 2018a), hospital/nursing home markets (e.g. Benjamin et al., 2007), healthcare infrastructure (e.g. Vecchi et al., 2010, 2013), hospital operational/management issues, seniors housing (e.g. Wiley and Wyman, 2012) and hospital building sustainability (Brotman, 2016). Much of this research focused on operational issues for healthcare real estate, with limited empirical analysis. This empirical analysis did highlight the performance of healthcare real estate relative to the other asset classes for both the UK (Newell and Marzuki, 2018a) and Australia (Marzuki and Newell, 2022), with healthcare real estate seen as being an important component in the performance of the real estate portfolio for the optimal mixed-asset portfolio for institutional investors.
Real estate industry reports have also assessed healthcare real estate in an alternate real estate sector context (IPF, 2015). Healthcare real estate reports are also produced by the leading real estate advisory groups; focussing on a practical operational/investment perspective (e.g. JLL, CBRE and Colliers); with these advisory groups often having established specialist advisory teams in the healthcare real estate space.
Data centres
The increasing significance of the data centres as an alternate real estate sector has seen several studies on data centre real estate on issues relating to valuation implications (McAllister and Loizou, 2009), planning considerations (Jones et al., 2013a), sustainability practices (Jones et al., 2013b) and energy consumption and efficiency. Marzuki and Newell (2019) also considered the real estate investment dynamics relating to data centres. Most of this research has focused on practical delivery issues, with only Marzuki and Newell (2019) considering the fuller performance analysis for the role of data centres by assessing the performance of US data centre REITs. Importantly, data centres were seen as an important component in the real estate portfolio for the optimal mixed-asset portfolio for institutional investors.
Self-storage real estate
Self-storage real estate research has been very limited; only being discussed broadly in the general alternate real estate papers (e.g. IPF, 2015; McIntosh et al., 2017); supplemented by industry reports. No direct self-storage performance index is available; hence this paper uses the US self-storage REIT performance index to assess US self-storage performance in the listed real estate space.
University student accommodation
Increasing levels of research are now being performed on university student accommodation. Ong et al. (2013) have considered student accommodation in assessing the importance of demand factors for student accommodation in a US university context. While McCann et al. (2019) considered financing strategies for university student accommodation in the UK, Sanderson and Ozogul (2022) considered investor strategies in Europe for university student accommodation, and Newell and Marzuki (2018b) considered the investment dynamics for UK university student accommodation. Livingstone and Sanderson (2022) also considered the market maturity and investment dimensions for UK student accommodation. Newell and Marzuki (2018b) showed the strong risk-adjusted performance and portfolio diversification benefits of UK university student accommodation, with university student accommodation being seen as an important component in the real estate portfolio for the optimal mixed-asset portfolio for institutional investors. Student accommodation reports are also produced by the leading real estate advisory groups (e.g. JLL, CBRE, Colliers and Knight Frank), at local and global levels.
Infrastructure
There is a significant body of knowledge regarding infrastructure investment; this includes aspects relating to listed infrastructure (e.g. Dechant and Finkenzeller, 2013; Finkenzeller et al., 2010; Newell and Peng, 2008; Oyedele, 2014; Oyedele et al., 2014; Peng and Newell, 2007; Wurstbauer and Schafers, 2015) and non-listed infrastructure (e.g. Bird et al., 2014; Marzuki and Newell, 2021; Newell et al., 2011). These studies clearly highlighted the strong performance of infrastructure in both the listed and non-listed formats; often seeing infrastructure figuring in the optimal mixed-asset portfolio for institutional investors.
From a practical perspective, this increased focus on the alternate real estate sectors has clearly been evident around issues such as increased investor interest and the need for more performance data for the range of alternate real estate sectors. Differences in the maturity of these alternate real estate sectors have also been seen across regions and for different levels of market maturity (i.e. developed real estate market versus emerging real estate market) (JLL, 2022).
Overall, this literature review highlights the research gap in conducting a more up-to-date consideration of real estate investment decision-making by institutional investors; particularly around the alternate real estate sectors and more recent real estate investment vehicles/channels to capture effective real estate exposure by institutional investors going forward. This is the empirical focus of this current paper.
Methodology
The specific alternate real estate sectors considered in this paper are healthcare, data centres, self-storage, university student accommodation and infrastructure. These alternate real estate sectors were selected on the basis of their general acceptance by institutional investors and performance data availability; particularly in the developed real estate markets.
For all of these alternate real estate sectors and the other asset classes, average annual returns, risk and risk-adjusted returns (via the Sharpe ratio) were calculated individually for each asset class over the specific timeframe. The Sharpe ratio enables risk-adjusted returns to be calculated to see an assessment of the level of returns per unit risk for an effective relative evaluation of the performance of the various asset classes, with the Sharpe ratio being calculated as excess market returns divided by risk. Larger Sharpe ratios reflect superior risk-adjusted performance; thus enabling a ranking of the risk-adjusted performance of the various asset classes.
The correlation coefficient of returns analysis was then utilised to statistically assess the relationship of these assets’ annual returns to identify portfolio diversification effectiveness, with lower correlation values between asset classes indicating higher portfolio diversification potential. Typically, correlations between assets which are slightly negative or close to zero reflect portfolio diversification benefits, whilst larger positive correlations (closer to 1.0) reflect a lack of portfolio diversification benefits. The correlation analysis results are presented in the inter-asset correlation matrix format for comparison purposes.
It should be noted that this paper goes beyond just presenting the analysis of 10-year forecasts of these alternate real estate sectors. Currently, this is difficult due to the uncertainty of future investment performance in the context of the ongoing impact of COVID on all asset classes globally. Rather, this paper presents the historic performance analysis, as well as articulating the ongoing drivers for the continued important of these alternate real estate sectors for institutional investors. This enables a simple but incisive empirical analysis for the alternate real estate sectors compared to the other major asset classes.
It is important to note that the direct real estate and non-listed real estate funds series used in this paper are constructed by using valuation-based measures of individual properties and not transactions. It is well-documented in the real estate literature that this exposes these real estate performance series to statistical issues related to valuation-smoothing and temporal lag due to the differences between the appraised value and the actual transaction price. This sees real estate typically suffering from a lack of sufficient transactions in each time period to see a rigorous transaction-based real estate return series developed; hence the reliance on valuation-based information. These issues can cause a false impression of investment qualities of direct real estate, such as an unrealistically high return-risk relationship, low risk and diversification benefits. Therefore, Geltner’s (1993) de-smoothing technique was employed using a de-smoothing parameter of α = 0.5 to reconstruct a higher resolution direct real estate total return series for the statistical analysis that accounted for the use of valuations, rather than transactions. The Geltner (1993) procedure is the standard procedure for de-smoothing real estate returns to obtain more realistic parameter estimates for direct real estate risk and inter-asset correlations, and this de-smoothing procedure has been used extensively in real estate research. This procedure sees the estimation of market values from appraised values without assuming an efficient market, by extracting this information from the observable valuation-based returns. As the de-smoothing process uses lagged returns, this resulted in 1 year of the total return data being used in the computation of this new de-smoothed real estate series. This de-smoothing process is not required for the stock market and listed REIT series used in this paper, as they are transaction-based series.
The specific data used for each of the alternate real estate sectors and their respective other asset classes are identified in each sub-section of the results and discussion section of this paper; also the specific time period to be considered in each case, with the specific time period used influenced by the available data time period for the performance metrics for the various alternate real estate sectors.
Performance analysis results and discussion
The following sections highlight the investment performance of the specific alternate real estate sectors:
Healthcare real estate: Performance analysis: UK direct healthcare real estate
The UK healthcare real estate index is a total return index (£) produced annually by MSCI (MSCI, 2021a) and is the benchmark for UK healthcare real estate performance. It is based on a UK healthcare real estate portfolio of 1405 healthcare properties valued at £8.143 billion from the portfolios of major UK healthcare real estate investors over 1999–2020. It comprises primary healthcare properties and secondary healthcare properties, with UK regional diversification. The other asset classes considered are UK stocks (FTSE100), UK listed real estate, UK direct real estate (MSCI annual index: 11,948 properties valued at £196.9 billion from over 270 portfolios) and 10-year government bonds. Ninety-day bills were used as the risk-free rate. Both the UK healthcare real estate and UK direct real estate returns were de-smoothed as per Geltner (1993).
Risk-adjusted performance of UK healthcare property: 1999–2020.
Source: Authors’ analysis and compilation.
Diversification benefits of UK healthcare property: 1999–2020.
Source: Authors’ analysis and compilation.
*significant at p < 0.05.
Overall, this sees healthcare real estate showing strong risk-adjusted returns performance over this period, being superior to that seen for direct real estate and the other major asset classes, and superior portfolio diversification benefits to direct real estate when assessed against UK stocks and listed real estate. This presents a positive picture for the added-value investment performance for UK healthcare real estate in a UK portfolio for institutional investors; particularly for the larger institutional investors who can effectively access these non-listed real estate funds. Whilst being an annual analysis, it is over a significant time period, reflecting the strong performance of UK healthcare real estate to the benefit of institutional investors.
Data centres: Performance analysis: US listed real estate (REITs)
To assess the performance of US data centres, the US data centre REIT sub-index (FTSE NAREIT Equity Data Centre index) was used; this is a total return index ($) that was assessed monthly over January 2016–November 2021. This listed data centres index comprised four data centre REITs with a total market cap of $127.2 billion at November 2021. Other asset classes assessed were stocks (MSCI US Stock index), REITs (FTSE EPRA/NAREIT US REIT index) and 10-year government bonds. The risk-free rate was US Treasury 3-month bills. As all series were listed, the de-smoothing adjustment procedure (Geltner, 1993) was not required.
Risk-adjusted performance of US data centre REITs: Jan 2016–Nov 2021.
Source: Authors’ analysis and compilation.
Diversification benefits of US data centre REITs: Jan 2016–Nov 2021.
Source: Authors’ analysis and compilation.
*significant at p < .05.
Overall, US data centre REITs showed strong returns and strong risk-adjusted returns, with clear diversification benefits relative to stocks and the overall REIT market. This reinforces the added-value benefits of data centre REITs in an institutional investor portfolio. While only based on a small number of data centre REITs over a short time period, the results are still positive in terms of the potential role of data centre REITs; particularly with the resulting liquidity from being in the listed real estate space that will benefit smaller institutional investors (with lesser AUM to allocate) requiring liquidity in their portfolio.
Self-storage real estate: Performance analysis: US listed real estate (REITs)
The performance of US self-storage real estate was assessed using the US self-storage REIT sub-index (FTSE NAREIT Equity Self-Storage index); this is a total return index ($) that was assessed monthly over January 1994–November 2021. This listed self-storage index comprised five self-storage REITs with a total market cap of $97.9 billion at November 2021. Other asset classes assessed were stocks (MSCI US Stock index), REITs (FTSE EPRA/NAREIT US REIT index) and 10-year government bonds. The risk-free rate was US Treasury 3-month bills. As all series were listed, the de-smoothing adjustment procedure (Geltner, 1993) was not required.
Risk-adjusted performance of US self-storage REITs: Jan 1994–Nov 2021.
Source: Authors’ analysis and compilation.
Diversification benefits of US self-storage REITs: Jan 1994–Nov 2021.
Source: Authors’ analysis and compilation.
*significant at p < .05.
Overall, US self-storage REITs showed superior returns and superior risk-adjusted returns; with portfolio diversification benefits with stocks being more evident than for the overall REIT market. This reinforces the added-value performance of US self-storage REITs for institutional investors. The longer timeframe for this analysis and the liquidity features of REITs see self-storage REITs as providing attractive investment features; particularly for smaller institutional investors that require this liquidity dimension.
University student accommodation: Performance analysis: UK direct student accommodation
The UK university student accommodation series used was the CBRE UK student accommodation total return index (£) produced annually over 2011–2021 (CBRE, 2021). In 2021, this UK student accommodation index comprised 209 student accommodation properties (over 65,000 beds) valued at £6.804 billion. This university student accommodation portfolio comprised both London and regional student accommodation real estate. Equivalent asset class metrics used were UK stocks (FTSE 100), listed real estate (REITs), direct real estate (MSCI direct real estate: 11,948 properties valued at £197 billion) and 10-year government bonds. Ninety-day bills were used as the risk-free rate. Both the CBRE university student accommodation returns and MSCI direct real estate returns were de-smoothed as per the Geltner (1993) procedure.
Risk-adjusted performance of UK student accommodation property: 2011–2020.
Source: Authors’ analysis and compilation.
Diversification benefits of UK student accommodation property: 2011–2020.
Source: Authors’ analysis and compilation.
*significant at p < .05.
Overall, UK student accommodation was the best performed UK asset class over this period, also being the best performed on a risk-adjusted basis, with lower risk than direct real estate. UK student accommodation also showed superior portfolio diversification benefits compared to direct real estate across the main asset classes considered by institutional investors. This presents a very positive investment performance picture for UK university student accommodation for the larger institutional investors who are able to access the features of non-listed real estate funds.
Infrastructure: Performance analysis: Global non-listed infrastructure
To assess the performance of global non-listed infrastructure, the MSCI quarterly global infrastructure asset total return index ($) was used over March 2008–June 2021 (MSCI, 2021b). This MSCI infrastructure index comprised 120 infrastructure assets with a total enterprise value of $44.2 billion. These infrastructure assets were from a range of major non-listed infrastructure funds. These assets were across a number of infrastructure sectors, including transport, power, airports, water and renewable energy, with global diversification across the US, Europe and Asia-Pacific. Equivalent asset classes were global stocks (MSCI World Equities index), global listed infrastructure (MSCI World Infrastructure index), global listed real estate (MSCI World Property index) and global bonds (JP Morgan Global Bond index: 7–10 years). The MSCI global infrastructure returns were de-smoothed as per the Geltner (1993) procedure.
Risk-adjusted performance of global infrastructure: Q2 2008–Q2 2021.
Source: Authors’ analysis and compilation.
Diversification benefits of global infrastructure: Q2 2008–Q2 2021.
Source: Authors’ analysis and compilation.
*significant at p < .05.
Overall, global infrastructure showed superior returns, lowest risk and superior risk-adjusted returns compared to the other asset classes, with portfolio diversification benefits. Global infrastructure and global listed infrastructure were also seen to operate as separate channels for infrastructure exposure. This sees global infrastructure via a non-listed fund as the best performed vehicle, with this style of infrastructure exposure favoured by the larger institutional investors.
Summary of performance analysis
Overall, this robust empirical analysis has presented a very positive picture for each of these five alternate real estate sectors in an institutional investor’s portfolio. Clear benefits were shown for each of alternate real estate sectors across the non-listed real estate space (i.e. healthcare, university student accommodation and infrastructure) and listed real estate space (i.e. data centres and self-storage). Whilst past performance is no guarantee of future performance, this performance analysis along with the increasing role of the drivers of the alternate real estate sectors provides a positive context to assess the potential strategic management issues for delivering these alternate real estate sectors going forward as part of the real estate portfolios for institutional investors. These management issues are highlighted in the next section.
Practical implications for managers
Many institutional investors are seeking to increase their real estate exposure in the future (CBRE, 2022b). This provides the opportunity to review their strategic objectives in the real estate space and how they obtain their real estate exposure in an effective manner to see the future-proofing of their real estate portfolios.
This paper has clear implications for institutional investors considering the inclusion of the alternate real estate sectors in their real estate portfolios and their ongoing effective management as real estate assets. These implications go well beyond the robust empirical analysis in this paper and highlight the importance of the alternate real estate sectors going forward for institutional investors across a range of dimensions (including ESG considerations) and for their fuller delivery into institutional investor real estate portfolios. This covers both the investment aspects, as well as the social infrastructure aspects. These management implications are detailed below.
Firstly, there is clear evidence of the alternate real estate sectors adding-value to institutional investor real estate portfolios. They will not take the place of the core real estate sectors in providing high-quality real estate exposure for institutional investors. But they will clearly add to the real estate opportunities available today via both non-listed real estate and listed real estate; particularly in a post-COVID context over the next 10 years. A key aspect here is looking at the institutional investor’s mandate in real estate and ensuring the alternate real estate sectors are part of this mandate; rather than being just limited to the traditional core space in office, retail and industrial real estate. This will require approval at the executive level for the institutional investor. This will hopefully see institutional investors developing strategic targets for both core real estate and alternate real estate exposure within their overall real estate exposure (typically 5–10%). While there are risks associated with the alternate real estate sectors, these risks can be effectively managed in the overall real estate portfolio; particularly via non-listed real estate funds which focus on portfolios of high-quality assets being managed by highly skilled real estate professional teams.
This is further reinforced by the different drivers for the alternate real estate sectors to that typically seen for office, retail and industrial real estate. This sees the drivers as more fully reflecting the structural changes in business and society today, with changing demographics, increased importance of technology, environmental concerns and issues relating to the impact of COVID-19. These are clearly structural changes relating to the way we do business and conduct our lives and will take on more importance over the next 10 years. There is also evidence that the alternate real estate drivers are different to those typically seen for office, retail and industrial real estate; which are largely economic growth drivers. These different drivers are important from a risk management perspective for institutional investors as they shape their real estate portfolios going forward.
COVID-19 has clearly highlighted concerns with office real estate and retail real estate as effectively contributing to portfolio performance; particularly with the work from home procedures adopted by many employers and lower than usual retail activity. This raises issues going forward about their effectiveness in a real estate portfolio in comparison with the pre-COVID situation; particularly around issues concerning future CBD office space requirements and retail real estate demand from the competition with online retailing platforms. This raises the opportunity to further future-proof the real estate portfolio by effective risk management by considering the role of the alternate real estate sectors in the portfolio.
In obtaining exposure to these alternate real estate sectors, most institutional investors will not have the in-house professional real estate expertise to actually acquire these properties directly. This further highlights the role of non-listed real estate funds which have the actual expertise and experience in their professional fund teams, as well as the ability to spread the financial risk across a number of institutional investors in these non-listed funds, and achieving scale in their portfolio. Importantly, many of the leading real estate investment managers have developed alternate real estate sector funds in recent years (e.g. healthcare and student accommodation), and now have the necessary in-house expertise for effective and high-quality exposure to these alternate real estate sectors. Whilst these non-listed real estate funds have limited liquidity, access to quality teams with professional expertise to acquire and manage these assets is essential and deliverable by these non-listed real estate funds. Smaller institutional investors are more likely to choose to obtain their exposure to the alternate real estate sectors via listed products (e.g. REITs), due to their smaller AUM and less experience in real estate investment. The use of non-listed real estate funds to get this alternate real estate sector exposure is further reinforced, as there is often an issue with obtaining suitable properties which are often tightly held or in limited supply. Non-listed real estate funds have a higher capacity to deal with this issue, particularly in a competitive real estate market.
With ESG issues taking on increased importance for institutional investors in their portfolios, this is an important issue for institutional investors to address to meet the requirements for their stakeholders. This is particularly the case for pension funds, whose stakeholders are already active in the ESG area, reflecting the importance they perceive for both financial well-being and social well-being from their investments. These alternate real estate sectors enable the institutional investors to embed ESG in their real estate investment strategy; particularly around issues such as renewable energy, greening the economy, focussing on green energy going forward via renewable energy sources, and prioritising net zero carbon strategies. This clearly relates to infrastructure in the renewable energy space. It also relates to social infrastructure such as healthcare properties and affordable housing which involve a strong social infrastructure mandate, and community well-being and essential services agenda. While ESG issues such as zero-carbon strategies can also be addressed within the office, retail and industrial real estate spaces, the alternate real estate sectors provide an opportunity for this ESG agenda to be developed at a more significant level. Non-listed real estate funds see this ESG mandate as an important (and essential) priority going forward, as it will impact their future capital raisings from ESG-focused stakeholders. The lack of an effective ESG agenda by these real estate funds will see major difficulties in the future raising of capital from the institutional investors such as pension funds. This ESG agenda cannot be ignored and is an essential component in effective strategic business management activities today.
In obtaining this alternate real estate exposure, some of this can be achieved via impact investing. This particularly applies to healthcare, other forms of social infrastructure with broad community benefits (e.g. affordable housing) and also to renewable energy with the increased focus on ESG and zero-carbon strategies. This will take on increased importance with institutional investors in the next 10 years, as impact investing increases in popularity as an investment style suited to institutional investors for the delivery of important agendas.
An area that clearly needs to be addressed is the development of additional performance series for those alternate real estate sectors that currently lack these direct real estate series; particularly for data centres and self-storage, as well as additional performance series in the emerging real estate markets. This will take time as sufficient scale in these non-listed real estate portfolios is needed, but they will be delivered by index provider players such as MSCI in the future. This will facilitate more informed management decision-making by institutional investors around the role and performance of these alternate real estate sectors; potentially at a global level.
Clearly, there are a range of implications for management to consider in accessing exposure to these alternate real estate sectors in the most effective manner over the next 10 years. The availability of high-quality alternate real estate vehicles/channels in both the non-listed and listed real estate spaces will be a key element in these real estate investment decision-making processes. The increasing focus on ESG will see further implications for managers as they shape their real estate portfolios, including both the traditional real estate sectors and the alternate real estate sectors.
Conclusion
The robust empirical analysis in this paper has clearly highlighted the added-value of the alternate real estate sectors in institutional investor portfolios; particularly relating to their risk-adjusted performance relative to the other major asset classes and their portfolio diversification benefits. Whilst past performance is no guarantee of future performance, the empirical analyses were conducted across several countries (the US, the UK and globally), across different timeframes and across the non-listed and listed real estate spaces. This reinforces the robustness of the alternate real estate sectors adding value in the real estate portfolio for an institutional investor going forward. Importantly, this performance analysis is supported by strategic real estate investment decision-making considerations that cover a range of business/social issues beyond just real estate. This is particularly relevant to institutional investors such as pension funds which have a strong ESG mandate in their investment activities to meet stakeholder requirements; with this likely to increase in importance over the next 10 years. We have already seen this playing out with the removal of fossil-fuel stocks from the investment portfolios of many institutional investors; based on ESG concerns by the institutional investors’ stakeholders. This will be further extended over the next 10 years as an increased focus is placed on renewable energy sources and the transition to a greener economy. The alternate real estate sectors are one of the potential beneficiaries of these structural changes at a global level.
Overall, this paper has shown the potential benefits of the alternate real estate sectors in adding value in an institutional investor’s real estate portfolio and the drivers behind the increasing importance of the alternate real estate sectors for institutional investors in their real estate management decision-making in the future.
The specific strategies adopted by institutional investors regarding their real estate allocation and how they achieve their alternate real estate sector exposure will largely depend on their real estate experience and their level of AUM. Fortunately, there is a range of both non-listed real estate vehicles and listed real estate vehicles to achieve these important goals. This will likely see larger institutional investors favouring the non-listed real estate channel (via real estate funds and separate accounts) and smaller institutional investors favouring the listed real estate channel (via REITs). With institutional investors in many countries expected to increase their strategic allocation to real estate, this presents an excellent opportunity to see the alternate real estate sectors (as well as the traditional real estate sectors of office, retail and industrial real estate) play an ongoing important role in delivering performance in institutional investor portfolios to the benefits of their stakeholders. The implications for pension funds are significant, in terms of meeting the demands of their increasingly active stakeholders around ESG issues, as well as future-proofing their real estate portfolios.
Footnotes
Declaration of conflicting interests
The authors declared no potential conflicts of interest with respect to this research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.