Friday Letter Investing on the fringe of fringe

 AXA Real Estate’s launch of a dedicated platform and strategy for alternative real estate is another milestone for an outlier asset class evidently growing in popularity.

It is not every day you hear established real estate investment managers extol the virtues of investing in police stations.

It was suggested on Monday when AXA Real Estate Investment Managers (AXA RE), the real estate investment management arm of French insurer AXA, announced the launch of a dedicated division for alternative real estate, that cop shops are now part of an increasing list of relevant asset types.

And why not? As Daniel Bowden, the fund manager charged by AXA RE to lead the division, Alternative Real Estate Business Line, said in the announcement, they can be considered long-term, can be indexed-linked and, important in these uncertain times for occupiers, be subject to government or government-backed leases.

While police stations caught the eye, AXA RE’s announcement speaks to a wider point: that institutional investors have a greater appetite for alternative investments than ever before. That these assets offer many of the same things that prime real estate from the traditional food groups of offices, retail and industrial property does, only adds to that assertion.

AXA RE pointed out there is increasing liquidity for alternatives, too, and the figures suggest similar. DTZ recorded €2.6 billion of transactions in the space last year. That was twice the amount of alternative assets to change hands during the boom market of 2007.

AXA RE has hammered its colours to the mast stating ambitions to grow its alternative exposure from 78 assets in seven countries, valued at approximately €750 million today, to more than €1.5 billion over the next three years. Considering DTZ’s numbers, that means serious market share.

It is of little wonder that AXA RE has garnered interest from investors for alternative assets when you consider just how compacted prime yields have become for traditional property types. Taking for a moment the region of the firm’s greatest exposure, Europe, according to CBRE, prime office yields in Europe have reached 3.7 percent while prime retail yields have passed 3.25 percent. That is marginally better than some fixed-income products out there, but: inject lingering paranoia about Europe’s sovereign debt, and there’s a debate to be had.

For investors that don’t fancy standing only in queues for that office block in London or Paris, then alternatives is one increasingly obvious answer.

That message evidently has already been absorbed by some investors. Take the Government of Singapore Investment Corporation, which last month expanded its joint venture with London-listed student housing developer UNITE Group with the launch of a platform that gives the state fund first rights on all its developments in the city. In a second example last month, PGGM, the Dutch pension fund provider, acquired a majority stake in University Partnerships Programme, another developer in the student accommodation space, with a view to benefiting from its UK-wide development programme.

Alternative real estate is not just a European story. Investors at this week’s Asian Association for Investors in Non-Listed Real Estate (ANREV)’s annual conference in Hong Kong discussed on the conference’s sidelines the virtues of growing an alternative real estate component to their portfolio. Far less coordinated and sophisticated a sector in the east than in the west at present, there nonetheless are mounting demographic reasons for examining more intently care homes, for example. Japan and Korea’s ageing populations are a well known issue for those countries, and in China the family unit dynamic is rapidly changing where families are more willing to live apart from their elders.

Care homes in Asia might today be to the institutional investor what police stations in Europe likely are – on the fringe of fringe. Even AXA RE admits these are “more diverse assets”. But the fact is the market generally is talking about alternative real estate and that talk is being backed with increasing action.