GLOBAL – Concerns over retail real estate's performance are driving fund managers towards alternatives, according to a new report by the Association of Real Estate Funds (AREF).

The association's third-quarter report on trends in non-listed balanced funds suggested a re-weighting away from mainstream retail assets towards leisure, which has rebounded significantly, and defensive sub-sectors such as hotels and healthcare assets.

"Balanced funds have a heavy weighting to the retail sector, and many managers are uncomfortable with such a large exposure to retail tenants regardless of the format," the report said.

Meanwhile, especially smaller funds have ruled out overheated London office, especially in the City, where asset sizes potentially create concentration risk.

AREF chief executive John Cartwright said investors appeared increasingly nervous about the retail sector as a result of short-term trends such as the high street's demise and longer-term trends such online migration.

"There is a willingness to accept that property is not all about shops, offices and warehouses," he said. "Some alternatives offer meaningfully longer leases."

According to the report, the average lease length for alternative assets in 2011 was 7.8 years, compared with a 4.8-year average for all property.

In addition, said Cartwright, the well-understood UK legal framework for leases removed one of the risk factors for investors looking at alternatives.

L&G managing director Bill Hughes told the IPD conference in Brighton last week that alternatives could "soon represent a double -digit percentage of our portfolio".

He forecast the recent increase in investment in alternatives – which now make up 30% of the IPD's quarterly index – would continue.

"We're pushing hard into student housing, healthcare and social infrastructure – all sectors that are underfunded by the public purse," he said.

"Depending on how you structure such deals, the opportunities to procure long-term, secure government covenants or university covenants are inviting."

IPD UK managing director Phil Tily told the same conference: "Healthcare, infrastructure, leisure and student housing are all on the agenda for every major investor looking to put the money where demographic changes are going to drive returns."