Alternative lifestyle

13/02/2018

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Ainslie McLennan, co-manager of the Janus Henderson UK Property PAIF, explains how many areas of the alternative commercial property sector, such as cinemas, student accommodation and hotels, are in tune with trends shaping the modern world and are becoming sought-after income-producing assets.

 

Offices, retail and industrial represent the principal commercial property sectors, yet there is a whole range of properties, classed as alternatives that have a valuable role to play in bringing diversification to a property portfolio. The specific property requirements from tenants within the alternatives sector mean that lease lengths can be long, often offering 20 years or more of income. In addition, these specialist assets have historically provided higher yields – the level of rental income expressed as a percentage of the property’s capital value – compared to higher-quality assets within the office, retail and industrial sectors.

The chart (below) shows how alternatives – indicated in red shades – have become an increasingly large component of market activity as investors seek out a more diverse tenant base. This demand has pushed up property prices and lowered yields* across the market for high-quality and well-located alternative assets.


Source: PropertyData.com, 31 August 2017

The Janus Henderson UK Property PAIF has been invested in the alternatives sector for a number of years. Aside from income and diversification, a key part of the attraction of alternative properties also lies in their relevance to the modern world as illustrated in the following sector comments.

*Yields have an inverse relationship to prices, for example as prices rise yields fall.

Leisure – mixing it up

People never lose the desire to be entertained and commercial property has an essential role to play in delivering the built amenities. The increasing urbanisation of the UK population means that people want gyms, cinemas and retail to be in convenient locations. Shopping areas gain from a mixed-use proposition that incorporates leisure facilities, such as restaurants and cinemas that mutually drive consumer traffic to one another.

Mixed-use schemes maximise convenience, offer a place where people can socialise and increase footfall. Muswell Hill is an example of the mixed-use property we like to hold within the London High Street sector of the market. The overall asset comprises a multi-let retail parade, a cinema and some residential space on the upper floors. A short video on the asset features at hgi.co/muswellhill-video.

 

Source: TH Real Estate

Student accommodation – professional development

One way that students can control their expenditure and ensure a decent living environment is through purpose-built student accommodation. This has the advantage of being surrounded by like-minded peers, offering a guaranteed level of amenities and providing better security. For landlords of student accommodation, the advantages are a relatively captive market with a reliable income. The PAIF recently completed development of an 89-bed student accommodation block on campus in Kingston-upon-Thames, South West London. A 25-year lease was signed by Kingston University in advance of completion, with annual uplifts linked to the retail prices index measure of inflation.

Source: Cushman & Wakefield, UK Student Accommodation Report 2016/2017

Data centres – monetising noughts and ones

The creation of more and more data demands additional storage facilities. Beyond simply finding space to store data, organisations need to keep digital information safe, private and secure, in order to protect intellectual property rights. In 2015 we acquired a data centre with a 28-year lease in Romford, Essex, which is an excellent location with strong demand due to its proximity to Central London. The PAIF also owns a data centre development in London Docklands, which offers 140,000 square feet of space.

Care homes – comfort in old age

We live in an ageing society. According to UK Government figures the population of those aged 75 or more in the UK is expected to grow from 5.2 million in 2014 to 7 million by 2024 and more than 8.7 million by 2034. As a result, demand for privately funded care homes is expected to more than double in the next twenty years.

Source: Personal Social Services Research Unit, Future of an ageing population, Government Office for Science, 2016.

The PAIF owns care homes in Edinburgh, Orpington in London, and Hailsham in Sussex, which are well located close to dense population centres.

Hospitals - patient capital

Private hospitals fulfil a useful role in supporting the UK’s healthcare system by treating patients privately and additionally providing outsourced treatment for NHS patients. This is particularly true of the PAIF’s hospital let to BMI in Poole. It sits opposite the town’s main NHS hospital and has a constant flow of referrals, particularly for eye operations. The UK’s growing and ageing population means that demands on the hospital sector are only set to increase. The Poole asset has more than 15 years remaining on its lease.

Hotels – a room with a view

Well-located hotels will always attract travellers and the hotel industry continues to see rising demand for bed space. Growing supply of beds also means that location, quality and value for money will remain key determinants of the success of a hotel.

The PAIF has a long lease on a Travelodge in Hackney, London and a Hub hotel in Edinburgh. The latter was a conversion of a vacant office building into a 145 bedroom hotel for Hub by Premier Inn, which appeals to the cost-conscious traveller. It is a smart hotel, where everything from room entry to check in is electronic, in tune with today’s modern lifestyles. The hotel comes with a 30-year lease on upward-only rent reviews.


Hub’ Premier Inn hotel, Edinburgh. Source: TH Real Estate

Portfolio positions are correct at 31 December 2017 and may be subject to change.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.


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Janus Henderson UK Property PAIF

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

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Specific risks

  • This Fund is dual priced. The price at which you buy shares/units in the fund will incorporate the transaction costs incurred in buying physical properties. When you sell shares/units in the Fund the price you sell at incorporates the transaction costs incurred in selling physical properties. The difference between these prices is called the ‘spread'. This spread is currently c. 5% and reflects the high transaction costs of buying and selling commercial property. Typically the buying price of an individual commercial property can be 7-8% higher than the selling price. The spread of the Fund is not fixed and may vary over time depending on the composition of the Fund.
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