Alternative real estate assets have coronavirus recovery role

The range of opportunities includes building retirement homes to help meet the government's housing targets and to work with local authorities to breathe fresh life into retail spaces in town and city centres across the country that are likely to suffer from the financial fallout of the Covid-19 pandemic.

Alternatives – a robust sector

The alternative sector, spanning purpose build student accommodation (PBSA), built-to-rent (BTR), co-living, later living and hotels, has not been immune from the effects of Covid-19, but it has fared better than many other areas of real estate and it is likely that the sector will revert back to business as usual more quickly than other areas and with less permanent scarring.

The retail sector, for instance, is undergoing a fundamental structural change that has only been hastened by the onset of Covid-19. The long-term need for office space is also, in a similar way, in question as businesses grapple with the growing trend and popularity of agile working which has accelerated as lockdown restrictions have forced previously sceptical employers' hands. This has obvious implications for occupancy requirements and the office market. 

Logistics has been popular with real estate investors for a while and the rise in online shopping and additional infrastructure required to fulfil the resultant demand is likely to mean that there will be an increased appetite for existing stock and the development of new facilities, leading to further competition for assets and a sharpening of pricing and yields.

It is against this backdrop that the already fast-growing alternatives sector must be viewed. It has weathered the biggest post-war crisis to hit the UK and offers investors the opportunity to deploy capital from which they can earn a good return.

Supporting economic recovery

The alternatives sector has the potential to play a real role in supporting the UK's recovery from coronavirus and dealing with the aftermath.

A central plank of the prime minister's recent 'Build Build Build' speech was the repurposing of vacant and unwanted commercial properties to create more housing. The planned increased flexibility will be welcomed in many quarters, but particularly in town and city centres which are likely to experience the greatest amount of surplus commercial property, particularly in the retail sector and to a lesser extent in offices.

Urban centres have already been the focus for BTR investors due to the access to transport and leisure facilities. More recently, though, investors in other sub-sectors of the alternatives market have started to look at opportunities in this area. A very good example of this is the nascent market of what might be termed 'Build to Retire and Rent' (BTRR), namely later living housing for rent. For many of the same reasons as the mainstream BTR market, increasingly older people want to have easy access to local amenities and feel enmeshed in the wider community.

Local authorities can also play a big part in rebuilding town and city centres. Many will own the shopping centre or main retail offering in their area or at the very least will have retained the freehold whilst selling off an investment lease. In either case, there is a great opportunity to come together with investors in the alternatives sector to put housing at the very heart of any regeneration.

With alternatives likely to be increasingly relevant in the future, it is important that investors and developers give consideration to legal, contractual and commercial issues that arise in the sector. Whilst there are some similarities between the different areas of alternatives, there are also some important distinctions. 

Pinsent Masons has produced a comprehensive guide to alternative assets (36-page / 5MB PDF) addressing issues such as tax and regulatory and operational matters arising in the sector, and the specific issues to consider in each of the sub-sectors of student accommodation, build to rent, co-living, later living and hotels. The guide covers England and Wales, Scotland, Northern Ireland and Ireland and should assist both new entrants to the sector and current investors who are looking to expand into new areas and jurisdictions.

This is an exciting time for the sector and, if something positive is to come out of the last few months, there is a real chance that this will be an acceleration in a number of areas of alternatives.