A graduate's insight into the 2024 Alternative Market

In the dynamic world of real estate investment, the alternative sector continues to carve out its unique niche, offering a diverse array of opportunities for those willing to look beyond traditional asset classes. As we reflect on the past year, it's clear that this sector has not only weathered economic uncertainties but has also emerged as a beacon of innovation and resilience.

The alternative real estate market, encompassing everything from automotive showrooms to nurseries and hotels, has demonstrated a remarkable ability to adapt to shifting investor preferences and market dynamics. This adaptability is perhaps the sector's greatest strength.

One of the most striking trends we've observed is the growing divergence between institutional investors and high-net-worth individuals in their approach to alternative assets. While institutions continue to gravitate towards large-scale, prime investments, individual investors are increasingly drawn to smaller manageable alternative assets where returns of 6.5%+ can be achieved with the guarantee of rental growth with fixed rental uplifts.

The automotive sector, for instance, has seen a surge of interest in smaller showrooms with long-term leases. These properties, often anchored by reputable brands, offer a compelling blend of stability and accessibility for individual investors. Recent sales of Audi showrooms in Nottingham and Bury St Edmunds, achieving net initial yields (NIYs) of 7.25% and 6.85% respectively, serve as prime examples of this trend, highlighting the enduring appeal of well-located automotive assets.

Meanwhile, the nursery market has emerged as a particularly intriguing sub-sector within the alternatives space. Driven by societal shifts and government initiatives aimed at expanding childcare provision, nurseries are experiencing a period of significant growth. The sector has seen yields rise from 5 - 6% earlier in the year to 6 - 7%, reflecting increasing rents and evolving investor expectations. This trend is further supported by operators like Busy Bees, who are setting new standards for rental commitments and operational scale.

Perhaps the most compelling success story within the alternatives sector this year has been the hotel market. The appetite for long-leased hotel assets, particularly those backed by established brands like Premier Inn and Travelodge, has been nothing short of remarkable. A standout transaction in Q3 saw a Premier Inn in Oxford achieve an exceptionally competitive NIY of 3.95%, underscoring the market's confidence in the long-term value proposition of quality hotel assets.

However, it would be careless not to acknowledge the challenges facing the sector. Recent changes to property taxation, including increases in stamp duty for additional properties and adjustments to capital gains tax, have introduced new considerations for investors. These policy shifts may temper enthusiasm in the short term, but they also underscore the importance of strategic, long-term thinking in real estate investment.

Looking ahead, the alternative real estate sector appears confident for continued growth and evolution. The nursery sector, in particular, stands out as a promising area for expansion, driven by favourable demographic trends and supportive government policies. The planned extension of free childcare hours to younger children in the coming years, including the expansion to children aged 9 months and above in September 2025, is likely to further stimulate demand and investment in this space.

Moreover, the broader alternatives market continues to benefit from its inherent diversity. From student accommodation to self-storage facilities and data centres, the sector offers a wide array of options for investors seeking to diversify their portfolios and tap into emerging trends.

In conclusion, the alternative real estate sector stands as a testament to the power of innovation and adaptability in investment. As traditional asset classes face increasing scrutiny and volatility, alternatives offer a compelling proposition: the opportunity to invest in tangible assets that not only generate returns but also play crucial roles in the fabric of our communities and economies.