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Financials

Wary investors seek solid foundations in UK property post-Brexit

* Investors buy student flats, hotels over offices, retail

* Alternatives preferred for long leases, steady tenants

* July returns on alternatives fall less than office, retail

* Brexit hits office deal values, alternatives steady

By Esha Vaish

Aug 31 (Reuters) - Property investors are buying into student flats, health centres and care homes, favouring their long leases and steady tenants over retail and offices which have been hit by Britain’s vote to quit the European Union.

Buying of so-called alternative or specialist property has picked up since June’s referendum knocked the wider real estate market, according to data from property consultants.

Alternatives accounted for 16 percent of total UK property investment in July, up from 13 percent in the second quarter, commercial property broker Lambert Smith Hampton said.

“People have said, post-Brexit, that they don’t want to take the risk profile that they did beforehand,” Shaun Roy, head of specialist investment at property broker Knight Frank, said.

“That has now led them to buy specialist property because it tends to be less risky, more defensive. Over the last six to eight weeks, we’ve never been busier.”

Property was among the sectors hit hardest by Brexit. Within weeks of the referendum, seven commercial property funds worth a collective 18 billion pounds ($24 billion) froze trading after panicked retail investors asked for their money back.

Fears that firms might move jobs to Europe, particularly in financial services, and return leased office space, along with concerns of a slowdown in High Street trading has spurred investors to seek out long leases and public sector tenants.

Since the vote, asset manager Schroders has completed a hospital portfolio deal that it hopes will generate returns of around 6 percent, thanks to the 25-year leases agreed with a local health authority.

Duncan Owen, head of real estate at Schroders, said its alternative fund had seen higher inflows than any of its others since the Brexit vote and it’s value is up by about 25 percent.

RUNNING FOR GOLD

While traditional property investments have returns of 7 percent to 10 percent before leverage, higher than the average across alternative sectors, falling capital values on office and retail in recent months may mean average returns now match, or even fall below, alternative sectors.

Office and retail total returns fell 3.7 percent and 3.2 percent respectively in July, while returns from “other” assets -- including hotels, leisure centres, hospitals and other non-traditional property classes -- were down only 1.4 percent, according to property consultant CBRE Group Inc.

Total return is often used to compare different assets as it takes in to account their value as well as rental returns.

Traditional property assets saw no rental growth during the month, while rents for “other” assets rose, CBRE said.

And the first post-Brexit updates from property companies also indicate greater caution in traditional property.

Derwent London Plc, which has an office-focused central London property portfolio worth about 5.2 billion pounds, reduced its rental growth expectations and cut the value of two new property developments.

By contrast, Primary Health Properties (PHP) Plc, which leases properties to general practitioners and the UK’s National Health Service, said transactions in the primary care real estate market had continued uninterrupted by the EU vote.

Ellie Jukes, property strategist at Legal & General Group Plc’s LGIM Real Assets, said that outperformance this year and next would come from the “bond-like income streams” associated with alternative property, which have strong covenants and indexation.

This category also includes hotels and in July, Legal & General bought a Premier Inn hotel in London on a 25-year lease.

Mike Sales, head of TH Real Estate, which manages property assets worth more than $96 billion, said student housing, hotels and health centres had become “more institutional, liquid sectors” due to their less cyclical nature and long leases.

Real estate lawyers, brokers and investors told Reuters that they had seen deals where the value of office and retail property transactions has fallen by up to 10 percent since the Brexit vote, while alternative property has remained stable.

“It’s a little bit like investors running to gold when they don’t know what else to do,” said Owen at Schroders. ($1 = 0.7567 pounds)

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