The rise of alternatives: How to deal with the shift in real estate use

The landscape of real estate investment is changing, fuelled by a transformative new economy with investors in the sector redefining 'alternative sectors' at the same time as generating outsized returns, according to a panel of industry leaders.

Hospitality on top

The promise of these alternative sectors is a sentiment clearly shared by other real estate investment experts with hotels generating a particular buzz. When delegates at the recent PERE Europe 2023 Forum were asked which sector they believed would outperform in the next 12 months, the hospitality sector tied with logistics and warehouse at the top, at 22 per cent. 

Christina Garcia-Peri, senior partner at Azora Capital noted that the focus on sectors which are not fully institutionalized offers opportunities to add value and make assets appealing and compliant for large institutional investors.

She highlighted Azora’s success in the tourism industry, specifically hotels and resorts, noting that while the initial acquisition of a luxury hotel in 2014 was met with scepticism, the approach proved successful, culminating in the sale of a £2 billion platform of leisure-driven hotels to Blackstone at a significant premium. 

"We generated over 33 per cent for our investors. Now we are doing exactly the same across all the countries in Europe; Portugal, Italy, Spain. We're looking at Greece, we're looking at Croatia, we're thinking about Montenegro,” Garcia-Peri, who was speaking as part of a panel discussion entitled "Getting ahead of the game – demand and fundamentals in new economy real estate”, said.

She added that while the asset class is becoming more institutional, it's sufficiently large and the underlying demand is sufficiently strong that Azora still sees plenty of opportunities. Garcia-Peri also touched upon the socio-cultural trends driving Azora’s investments, such as increased travel among younger and older generations and a shift towards experience over property ownership. 

Consumer demand

Mariya Lazarova, head of TUI Asset Management and Advisory stated that after the Covid crisis, TUI explored different avenues to grow its portfolio and after reaching out to large investors, saw a lot of interest in hospitality.

She explained, “We’re a vertically integrated company and what that allows is for large investors to have direct access to these hotels and also participate in the development of new and exciting new destinations. For instance, it's okay to have a hotel in destination X, but if you can't bring the customers to that destination and cannot make sure that the hotel is occupied, then what good is that?”

She added, “That’s where TUI comes into play. We have over 21 million customers out of Europe and it looks like a very interesting proposition for long term institutional investors.” 

Looking ahead, Dhurv Sharma, CEO at Marcena Capital stated that moving forward, he believes the demand and fundamentals of the new economy of real estate in the 21st century will be driven mostly by further urbanisation in the emerging world, the integration of working and living practices into real estate as well as the demand for sustainability and ESG. 

He added: “Those are the demands of the 21st century and then managers and investors react to it. Institutional capital, whether it comes or goes is a moot point. These industries, these alternative asset classes will be determined by the first movers.” 

Garcia-Peri pointed out other significant factors including cultural changes, such as younger generations' preference for experiences over homeownership, the disruptive impact of ESG, and the role of technology in creating new business models and changing how real estate is used. 

Kirill Zavodov, head of real estate equity EMEA at PIMCO added: “Alternatives [are] not about packaging old real estate in a new way. It's creating the right real estate that fits the needs of the consumer in a way that hasn't been done before.”