Big Investors Take On Risk
With New Property Classes

More institutional investors are targeting emerging real-estate asset classes that typically offer better returns but more risk, according to a new survey.

About 30% of respondents to the survey by the Association of Foreign Investors in Real Estate, or Afire, said they would be investing this year in new property types in the U.S., such as senior and student housing, resorts, storage facilities and infrastructure such as highways. The Washington-based nonprofit organization polled about 50 of its members, who own $601 billion of real estate globally, including $184 billion in the U.S. Organization members include pension funds, insurance companies and real-estate funds from countries including the U.S., Germany, Britain and Australia.

"These sorts of assets are becoming more popular because they are considered to be higher risk, thereby offering potentially higher returns," says Afire Chief Executive James Fettgatter. "The other advantage is that there are quite a lot of these assets available and, to date, less people are competing for them than for core assets," such as office buildings and shopping centers.

In Europe, mature toll roads are likely to provide yields of around 8%, while a water system can generate returns in excess of 10%. Office properties in major cities in Western Europe often offer returns below 5%. (The yield is the annual percentage return, expressed as the ratio of annual net income to the capital value of a property.)

Other alternative assets, such as senior and student housing, are supported by longer-term demographic shifts -- growing elderly and student populations, for example. The British government has said it hopes half of the 18-to-30 age group will be involved in higher education by 2010, up from 42% today.

It isn't uncommon for government-supported housing to have leases of as long as 30 years, with rental increases linked to inflation and total annual returns of more than 10%, says Andrew Allen, head of research and strategy at property-fund manager Cordea Savills LLP in London. "There are huge investor opportunities emerging because governments face financial pressures, which are leading them to explore the private provision of homes for those who are not able to provide for themselves."

Among the risks: less liquidity because these assets aren't bought and sold as frequently as mainstream properties, such as offices. Investing in transport infrastructure can involve large capital outlays that limit diversification opportunities.

European fund managers are also getting in on the act, says Lisette van Doorn, chief executive of the European Association for Investors in Non-Listed Real Estate, or Inrev, based in Amsterdam. Nearly one-third of polled investors, or 28%, already had invested in infrastructure assets, according to the survey, with another 28% saying they are "quite likely" to invest in such assets this year, according to a recent Inrev survey of European institutional investors and fund managers who hold €89 billion ($115 billion) in real-estate assets, directly and indirectly.

Respondents to the Afire survey again rated London the top global city for cross-border real-estate investment, followed by New York, Paris, Washington and Tokyo. While Japan leads Asia in attracting foreign interest in real-estate assets, respondents also were interested in opportunities in China, India, Singapore and Hong Kong.

About $44.8 billion in commercial real-estate deals were transacted in London last year, compared with $23.96 billion in Paris, $32.6 billion in New York's metropolitan area, $30.4 billion in Tokyo and $15 billion in Washington's metro area, according to real-estate advisory firm Jones Lang LaSalle and Real Capital Analytics Inc., a New York-based research-and-consulting firm. These figures include retail, office and industrial deals and exclude apartment and hotel sales. Only deals where properties are valued at $5 million and above are included.

For the first time since 2001, when New York shared the No. 1 spot with Washington, New York has re-emerged as the top U.S. city for foreign investors. The reason: the city has proved its resiliency after the Sept. 11, 2001, terrorist attacks, says Mr. Fettgatter. "There's an increasing confidence that you can't put a stop to New York," he says.

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