Structural tailwinds and re-allocation of capital to drive growth in alternative real estate

AUSTRALIA, 17 January 2022 – Interest in alternative real estate continues to rise with many sub-sectors showing substantial potential for income growth on the back of key demographic tailwinds – a crucial factor in the search for yield by investors in a high-inflationary environment.

The latest research from real estate services firm JLL – ‘Alternatives Investment Outlook 2023’ - shows that investment volumes into alternative real estate sectors have remained at elevated levels by historical standards since 2019.

Alternative sectors can roughly be divided into three categories: living, social infrastructure and infra-lite. They cover sectors including student accommodation, data centres, retirement, co-living, build-to-rent (BTR), special disability accommodation, aged care, private hospitals, child care, self-storage and renewables.

Although 2022 has presented challenges due to economic uncertainty, the value of the alternatives investable universe has continued to expand, largely driven by high-growth sectors such as BTR and Data Centres.

JLL’s Associate Director – Alternatives Research and author of Alternatives Investment Outlook 2023, Louise Burke said, “Almost all alternative sectors have compelling demographic or structural tailwinds. For example, these range from the rising number of two-working-parent households fuelling child care demand, to Australia’s ageing population profile spurring demand for healthcare services and senior living. However, variations in tailwind strength alongside relative sector maturity and regulatory hurdles will dictate the potential for investable universe growth over the next decade.

“Overall, our 2023 outlook is that alternative real estate sectors are anticipated to play an increasingly important role in portfolios, particularly as investors re-weight allocations away from core assets particularly challenged by structural changes such as eCommerce and working from home habits,” said Ms Burke.

JLL’s Head of Alternative Investments – Noral Wild, said, “Underlying end user demand is supporting the case for real rental growth across several sectors which is helping fight the impacts of rising financing rates on capital values.

“Many alternative sectors offer dynamic operating models where rents can be reset more periodically compared to the typically longer lease terms in core sectors. This includes sectors like student accommodation, BTR, self storage and some data centre operational models.

“In downturns, rents can be lowered to maintain occupancy as we saw during the COVID-19 crisis period in more developed offshore markets. Conversely, in a high inflationary environment such as the current climate, rents can more easily keep pace with high levels of underlying demand growth to outpace inflation,” said Ms Wild.

JLL’s Senior Director – Alternative Investments, David Hill said, “JLL’s outlook for the Alternatives sector in 2023 is that the ‘living sectors’ will increasingly gain attention from global investors given the dynamic rental models of living assets, allowing owners to capitalise on a strong rental market due to housing supply shortages and higher levels of inflation.”

Living includes investment categories such as BTR, student accommodation, co-living and senior living product in addition to other niche specialities such as specialist disability accommodation and key-worker housing.

JLL estimates the increasingly spotlighted Australian BTR sector is valued at around $5.4 billion, including completed and under-construction assets. Additionally, JLL estimates there is approximately a further $10 billion of stock that is approved or in the planning process, presenting a clearly identifiable growth trajectory for the sector.

Mr Hill said, “The BTR sector is positioned for substantial growth and will likely form the centre of living strategies in due course. However, with construction costs causing short term delays in bringing some operational BTR product to market, capital is beginning to increasingly consider operational Purpose-Built Student Accommodation (PBSA), co-living and later living investments as a means to gain immediate access to operational portfolios and platforms of scale.

“Mid-size fund managers may also look at building an ‘operational’ living strategy through the acquisition of a variety of living assets extending to Special Disability Accommodation (SDA) or other built living stock conversion opportunities,” he said.

JLL’s Outlook Report revealed that the alternative sectors have not been immune to the challenges of 2022 amid growing global uncertainty and rising financing costs.

While Australia’s alternative sectors present a compelling proposition for investors, strategy implementation and deal execution for scale operational purchases remains challenging which has held back capital flows to date.