Underneath the arches

The Mitchell Brothers, of EastEnders, will be gutted: the Duke of Kent for their garage in the arches could soon be rising fast. Watch out Blackstone – negotiating the rent with your new tenants isn’t going to be as easy as with Next! It could be concrete slippers and a sleep in the Thames. Classic ending; duff duff.

Ahem. So in English, Blackstone has paid £1.5bn for Network Rail’s arches property portfolio. This is clearly a niche alternative asset class with excellent growth opportunities. Or is it…

Is it a parade of shops? Is it a line of small industrial units? Is it a row of artisan cafes? It seems to me that it’s property with a curved roof. As Brexit trudges on, is this really a good investment?

It reminds me of that other alternative asset class – student property. In other words, a block of flats near a university. Whenever we’re confronted with this “alternative” investment, I can’t help but think it’s in competition with other flats nearby and subject to local market conditions. That doesn’t sound like an alternative to me. But then students make the best tenants, being as quiet and house proud as they are, so I’m probably wrong...

“OK, the broker usually tells us, “but medical centres are definitely alternative. There’s virtually no risk as there’s only one tenant – the government.”

I dunno. Purpose-built, specialist-use buildings with no obvious secondary buyer? I guess public service cuts come along very rarely, right? And everybody loves PFI …

It’s not only property niches that worry me. I’ve talked about aircraft leasing before – in one case we saw, it was basically a single sovereign emerging debt fund with planes as collateral. More recently, we’ve seen maritime specialist lending funds too. These popped up as banks moved away from fleet financing due to capital adequacy requirements. Lending to this sector is highly cyclical and, I’d wager, highly correlated to risk assets. I bet it’s “low vol” though.

I could go on. There are many specialist investment companies now raising capital for areas of finance once occupied by the banks. That’s ok, but I do wonder who they are targeting and how well they represent the risks people are taking on. They are usually tagged as “low volatility” with high income yields, which look very attractive to many people reaching for an income in our topsy-turvy world. But the conflation of “low volatility” and “low risk” – they are not the same thing – is misleading. These investments tend to be strongly correlated to stock markets when the bottom falls out of them and illiquid to boot.

That’s not to say they are always misleading, unattractive or downright dangerous. Some specialist credit funds are extremely interesting – collateralised loan obligations, for example. Three-letter acronyms beginning with C and ending with O have had a poor rap since the global financial crisis, but the structure is sound. Combining many different loans to create a diversified portfolio of debts is a good strategy. You just have to be sure that the underlying loans are worth what you’re paying. We think the CLO structure especially suits these asset classes. It’s the so called “alternative” funds that worry us.

At the end of the day, with any investment you are either buying an asset or lending money – all other definitions are window dressing. You need to be happy with the credit rating and diversification of the borrowers you are lending to, or convinced of the quality of the assets you are purchasing and sure of a liquid secondary market when the economy stalls. Buyer be very aware.

In the meantime, I look forward to the Blackstone rent collectors supping a pint in the Queen Vic, wondering where all their tenants went.