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Alternative property sector sees a boom as investors crowded out of core market

August 23, 2018 / NEWS

Alternative property sector sees a boom as investors crowded out of core market

The alternative property sector is set to experience a rise in institutional investment, according to a recent report from professional services and investment management company JLL.

The report states that the booming interest in alternative real estate comes at the same time as the amount of core property becoming available, which includes buildings such as shopping malls, commercial offices and industrial facilities, is falling.

Property finance shifts focus

Indeed, while the amount of capital being pushed into the Australian real estate sector is forecast to grow by over 7.5 per cent annually, core real estate investments are not expected to surpass 5 per cent per year. For the average property developer, traditional targets for institutional capital are being sidelined in favour of real estate sectors covering areas such as data centres, retirement homes, private hospitals and self-storage facilities.

At the moment, more than 85 per cent of Australian commercial property investment is being channelled into offices and retail facilities, as they have tended to be the most lucrative options for investors in the past. However, both of these sectors have taken a hit recently as structural trends have lessened the need for office and retail spaces.

In this way, investors are having to get more inventive in order to continue making decent returns. Some may decide to simply pay more for traditional commercial properties or start looking offshore, although capital flowing out of the country will likely be more than offset thanks to inbound investment.

What are the best strategies for investors?

A good strategy for investors may be to opt for these options while simultaneously investing in alternative property sectors. On top of the aforementioned options, agricultural centre, student living quarters and the residential build-to-rent market are all potentially lucrative sectors, and early adopters are likely to benefit the most from getting involved.

In the long-term, these new sectors are likely to become increasingly popular (and necessary) options for commercial property investment, driven by Australia’s increasing urban density, population growth, housing affordability, and ageing population.

The healthcare sector in particular is already starting to see the effects of the move over to alternative real estate. Plans were recently revealed for the possible float of a specialised property trust focusing on the healthcare sector, made up of unlisted funds Heathley, a boutique investment house.

What activity is already occurring on the market?

A few of Australia’s private lenders and players have already dipped their toes into the burgeoning alternative sectors, including Australian Unity and Barwon Investment Partners. Meanwhile, Canadian company North West Healthcare Properties is already building its presence in Australia, having recruited Craig Mitchell to deal with the intricacies of the deals.

In the sub-sector of data centres, meanwhile, companies 360 Capital and NextDC, a storage operator, are fighting it out to take control of the three-asset portfolio of real estate investment trust Asia Pacific Data Centre.

In terms of the retirement living segment, various companies have jumped into action to exploit its lucrative potential. US-based pre-fab housing company Hometown America along with Canada’s Brookfield, for example, are competing to get hold of Getawat Lifestyle, a budget retirement accommodation business.

Ultimately, while the accumulation of local superannuation capital is a decent source of investment into property various, new global trends will shift more money into the world of real estate according to JLL’s findings.

One such trend is that Japan’s expansive pension system is shifting into property assets. In China, meanwhile, the life insurance sector is seeing a boom.

While it may seem to be the case that the interest in alternative properties is merely the sign of a late-cycle trend – a product of investors being crowded out of a core market thanks to strong capital market – the long-term causes of alternative investments seem to suggest otherwise, with JLL’s spokespeople suggesting that the trend can be explained by more than just cyclical factors.

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