JLL predicts Alternatives to outperform commercial property in 2018

Investor demand for Alternatives set to increase amid economic uncertainty and weaker prospects for commercial sectors

January 17, 2018

Alternatives transactions totalled a record £15.7 billion in 2017, higher than JLL's prediction at the beginning of the year of £15 billion.  Alternatives made up 26% of the market with total commercial property volumes above £60 billion. JLL's own market share in Alternatives was 32% of all deals last year.

JLL has also published the results of its Alternative Investors Survey for the sixth consecutive year which shows that the average allocation to Alternatives for 2018 is 28%, the same level predicted would be allocated in 2020 in last year's survey.  Highlighting growing investor appetite for Alternatives, our respondents now anticipate to have an allocation of 34% by 2020.  This is equivalent to an additional £10bn of investment into Alternatives above existing levels over the course of the next two years.  Not only is this a significant proportion of the overall commercial real estate market, it also suggests a continued increase in Alternatives market share.

Ollie Saunders, Lead Director, Alternatives, commented: "Investors are becoming increasingly aware of the core fundamentals that support Alternatives, as well as the benefits of higher returns and long dated income.  However, the biggest factor that is going to further boost the growth of Alternatives is the evolving amount of data and analysis available to help explain risk to our investor clients.  Our key prediction for 2018 is that Alternatives will continue to outperform more developed markets."

Predictions for 2018 by sector

Student Housing
Investor focus on student housing in well-supplied regional markets will turn to the redevelopment of existing university owned stock.

Private Rented Sector (PRS)
More than £3 billion of deals, with institutional investors and the public sector taking a more active role.

Retirement Living
Pension fund investment to deliver new tenure models and more mid-market developments.

More than £4 billion to be invested across care homes, primary healthcare and specialist markets which provide long-term, inflation linked income.

Leased Hotels
Investment levels to remain stable after a stronger than expected 2017.

Self Storage
£250 million of deals in the UK and £250 million in Europe as the sector increases in size.

Data Centres
Operational data centre M&A activity to increase, and £200 million of real estate data centre investments in 2018.

Increased competition for sites will result in robust investment activity and scope for further yield compression.

James Kingdom, Head of JLL Alternatives Research, concluded: "Lack of supply will remain a challenge for Alternatives investors, whether in finding appropriate product to acquire or an operational partner to work alongside.  As a result we expect to see further innovation during 2018 leading to investors finding new ways of entering the market. Operators will look to transfer expertise into similar sectors, resulting in more mixed-use Alternatives developments."