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Beyond niche

Published: 01 October 2016

By: Meghan Morris

Forget student housing or self-storage. Some investors are diving into even more unusual real estate investment strategies, hoping to find yield, steady operating income or protection against a downturn.

Depending on an investor’s taste for risk and rarity, the four main real estate food groups are looking a little blander these days.

In the unending quest for yield, some investors are moving far away from traditional investment strategies, shunning office, industrial, multifamily and retail in favor of an evolving menu of nontraditional real estate strategies. Some formerly niche property types have become more palatable to a wide range of investors, with many public pension funds now invested in student housing, for example. But another world of emerging real estate investment strategies is attracting investors trying to spot the next big trend well before it pops up on their peers’ radars.

These nontraditional real estate investments often blur the line between private equity strategies of investing in operating businesses and traditional real estate plays. Because the underlying business model is regularly different than, for example, leasing an office building, investors frequently partner with expert management companies. In the case of a parking structure investment in the US (detailed on the following page), Los Angeles-based private equity real estate firm Stockdale Partners teamed up with venerable British investment house Grosvenor Group to invest and Ace Parking Management to oversee day-to-day operations, for example.

Working with operating partners directly, rather than investing through a commingled fund structure, can be an attractive investment strategy for investors looking to decrease fees. “The blanket theme in niche real estate investments is that people are looking for yield and they’re looking for opportunities that aren’t widely marketed,” Dan Michaels, a managing director at Stockdale, tells PERE. “Everyone has a different theme but the overall consensus is ‘let’s go direct to operators and focus on a specific niche where we can build the expertise.’”

Michaels says niche strategies can also grow in tandem with more traditional property types. In cities, for example, office and multifamily development has wiped out many surface-level parking businesses while adding more residents or workers who need the spaces.

Some of these strategies are also intended as a defense against a real estate downturn. Michael Schwartz, head of consultancy RSM’s real estate advisory practice, notes that technology-driven property types continue to grow as consumers require ever more bandwidth. Even in an economic downturn, he predicts, mobile phone users will still pay for the data transmitted through cell towers.

Niche does not necessarily translate into guaranteed returns, though. Just ask SC Capital, a Singapore- based private equity real estate firm that had an innovative plan to buy, refurbish and moor an old cruise liner for use as a luxury hotel in Rangoon, Myanmar. The original plan failed to materialize last year when costs associated with dredging around the pier where the liner was to be moored exceeded the firm’s original underwriting, and investors, including several US public pensions, agreed the boat should be moved elsewhere.

On the following page, PERE examines four nontraditional real estate plays and the rationale behind each.

Fill up on returns

Strategy: Gas stations

Location: US

Firm: Brookwood Financial Partners

Brookwood is seeking to raise $300 million for its BW Gas & Convenience Fund. With capital from the vehicle, the firm plans to buy, renovate and operate between 600 and 1,000 gas stations throughout the country. The firm has a 20 percent net internal rate of return target.

“A significant focus of our strategy is to create an initial platform within each region, acquire additional stores to achieve economies of scale and add value to the portfolio by improving both the real estate and in-store margins,” said Mark Daniels, Brookwood’s director of alternative real estate acquisitions, in a statement earlier this year.

A place to park capital

Strategy: Parking garages

Location: Southwest US

Firms: Grosvenor Group, Stockdale Capital Partners

London-based Grosvenor is partnering with Los Angeles-based Stockdale to invest up to $100 million in parking structures in the southwestern US.

“I know of very few, if any, institutional funds or partnerships that are pursuing parking,” Dan Michaels, a managing director at Stockdale, tells PERE. “It’s the most overlooked industry I’ve seen today, primarily because you need a parking management operator and there are only a few that cover the country.”

Despite the rise of ridesharing platforms such as Uber, he predicted that investing in parking structures, currently a fragmented market, will continue to produce good returns as more surface parking lots are converted into multifamily and office buildings, leading to greater urban demand for parking spaces.

Depending on data

Strategy: Data centers

Location: Asia

Firm: Keppel Capital

Earlier this year, Keppel Capital started fundraising for its Alpha Data Centre Fund with a $500 million target. The fund is one of the first blind-pool vehicles in Asia to specifically target the asset class. Investors had previously been dissuaded by the elaborate costs and expertise involved in building the technical infrastructure for a data center.

However, long lease terms and contractual rental rate increases provide a stable income stream, making it an attractive investment for institutional investors such as pension funds and sovereign wealth funds. Data centers are also often selling at much higher yields than other property types in Asia.

Mobile opportunities

Strategy: Cell towers

Location: Worldwide

Firms: Och-Ziff Real Estate

Blurring the lines between infrastructure and real estate, cell towers have evolved in tandem with the mobile devices they power. While not a sexy piece of real estate, the steady revenue stream is attractive to investors looking for fixed income sources, says Michael Schwartz, head of consultancy RSM’s real estate advisory practice. Investors range from individuals to private equity giant Och-Ziff.

“You’re not going to see a lot of appreciation in value,” says Schwartz, who advises companies on cell tower leasing. “But if we see a hit in the real estate world like we did in 2008 and 2009, I can’t see cell towers being as affected. People are still going to need cellphones.”

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