The Rise And Rise Of The £750B Alternative Real Estate Sector

Offices, shops and even logistics units aren't topping real estate investors’ shopping lists this year.

Instead, it is new energy infrastructure like solar farms, electric vehicle charging units and battery storage sites, alongside data centres and healthcare assets, that are top of the tree, according to the latest Emerging Trends in Real Estate Europe report, published by the Urban Land Institute and PwC.

New energy infrastructure was the sector cited as having the best prospects for investment and development in 2024 and beyond, according to surveys and interviews with more than 1,000 real estate professionals across Europe. That was followed by data centres and healthcare.

Of the top 10 sectors, only logistics at No. 7 could be considered part of the big three traditional asset classes, with the remaining places taken up by various strands of residential, including student housing, co-living and serviced apartments, along with another niche sector: self-storage. 

Although they remain among the largest asset classes by investment volume, the share of the market commanded by office and retail will continue to shrink, according to the report. As real estate becomes more akin to “social infrastructure,” sectors that meet that definition are expected to continue growing. 

“The people who make money over the next decade will be the people who solve the problems of society,” one investment manager interviewed for the report said.

Those problems include affordable housing, healthcare, decarbonisation, digitisation and communication, and this is increasingly where money will flow, the report says. 

The Emerging Trends Europe report cited multiple data points to highlight the growth of alternative real estate sectors over the past decade or more, including the fact that when the report was first published in 2004, it analysed the prospects for just nine sectors. That number is now 26. 

The listed real estate sector, particularly in the U.S., points to where the industry is headed. In 2009, office, retail and industrial REITs accounted for 47% of the market capitalisation of U.S. REITs, according to research by CBRE Investment Management, using FTSE Nareit All-Equity Index data. By June 2023, that share was 24%, with office and retail falling from 38% to 11% of the whole.

Cellular/mobile phone towers now make up the single largest sector of the U.S. REIT universe, and data centres and healthcare are both almost as big as office and retail combined. 

Europe’s listed real estate sector is not as diversified as that of the U.S. or the private/unlisted real estate sector.

But the trend is the same, although in Europe, much of the investment in alternative assets is happening in the unlisted sector. Alternative sectors, including residential, accounted for 33% of the €326B invested in Europe in 2022, up from 21% of investment in 2007, according to MSCI. The share of office and retail fell from 70% to 47% in that time.

In the UK, sectors and assets with a big operational component have the potential to grow from a current asset value of about £250B to more than £750B over the next decade, research by law firm Macfarlanes and management consultancy Montfort Communications found. Build-to-rent residential and senior living are likely to see the biggest absolute growth, while single-family rental will increase the most relative to its current size.

Opportunity abounds in new energy infrastructure as well. Real estate’s focus thus far has been on cutting back on the use of carbon-burning energy. But industry players now believe real estate has the chance to create clean energy, supercharging its drive toward sustainability, according to the Emerging Trends report.

Asked which very niche or emerging sectors they expected to increase their exposure to over the next five years, 42% of survey respondents cited solar farms or solar energy generation assets as the top pick. Geothermal energy generation assets, wind farms, electric vehicle fleet charging and battery storage assets also scored highly. 

“For probably the first time ever, the real estate industry has got a chance to take on the transport and hydrocarbons market, and we’re really getting after the big hydrocarbons businesses,” one investment manager said, talking specifically about EV charging assets. 

On the healthcare front, medical office buildings and private healthcare provider clinics were among the top niche sectors cited. 

“Doctors seldom go bankrupt,” one interviewee for the report said. “They are a basic human necessity, and they’re conservative people. So, once they get into your premises, they want to stay because it’s a hassle to inform the patient base to move around.”

Respondents were also bullish on data centres, pointing to the growth of generative artificial intelligence, epitomised by tools like ChatGPT, as an indicator of increased demand as well as the public pronouncements of one firm.

“If a Blackstone decides data centres is our new [growth] sector, they will make the market like they did in logistics, but there will be developments needed,” one interviewee said of Blackstone’s announcement earlier this year that data centres were the firm’s next conviction sector.

One industrial property company head likened data centres' stage of development today to the logistics market of 10 years ago, implying enormous scope for growth, the report says. 

Beyond energy, healthcare and data, food security was also cited as a growing societal concern that will be an area of potential expansion for real estate. As societies continue to expand, the challenge of feeding populations will require innovative solutions, according to the report.

Conflicts like the Russian invasion of Ukraine, with its impact on grain supply, underline the fragility of global food supply chains, a problem for which cold storage provides a potential solution.  

Vertical farms have garnered a lot of attention but remain difficult to build, and power is an issue for this sector, much as it is with data centres. On the edge of the radar are onshore fish farms, which are seen by some in the fishing industry as more sustainable than offshore facilities. 

As water security becomes more prominent as a geopolitical flashpoint in the face of rising temperatures and a climate emergency, onshore water desalination plants could become another common target for real estate investors.

The shift to alternative sectors has changed the perception of where value lies in real estate, according to the report: away from assets that are the easiest to lend against or finance, with long leases and little management required, and toward assets that will be buoyed by consistent demand. 

The change in real estate represents an opportunity to make money and have a positive impact on society. 

“There are two key themes for countries in Europe, and they are security and dignity,” one fund manager said, adding that in tough times, there is an emphasis on food, water, border, data and climate security.

Those priorities can become “quite nationalist and selfish,” the manager said.

But the same manager added, “Any decent society needs dignity as well. You need to make sure as the wealthier [members of society], you pay your tax, you help look after people who can’t afford healthcare or education. There’s simply no point you being secure in your little bunker if the rest of the society is struggling out on the street.”