A shortage of opportunities in core real estate sectors is forcing Australian investors to look at alternative asset classes.
The future growth of Australian superannuation money in the local market is estimated at an average of 7.5 percent per annum (already eight percent of A$2.54 trillion of funds is invested in property), and the already record levels of global investment flowing into Australia is expected to grow by even more.
By comparison, the development of core real estate assets will grow by less than two percent per annum over the next decade.
These market dynamics are putting pressure on investors to find new relatively safe sectors to put their money, says Noral Wild, Head of Alternative Investments, Australia at JLL.
“Investors will be faced with three choices: they can continue to pay more for core real estate, look offshore – but capital leaving Australia is likely to be more than offset by foreign interest, or they can find alternative real estate sectors to invest in.”
While the most likely outcome is a combination of all three, Wild says “there is little doubt that institutional investment will have to consider a move into new sectors long-term.”
Alternative assets include healthcare assets, build-to-rent residential, student accommodation, seniors living, childcare, self-storage, service stations, data centres and renewables. and agriculture.
The demand for these properties are driven by global and national mega trends including population growth, an ageing population, housing affordability, globalisation and technology.
For smaller investors, alternative sectors provide an opportunity to invest more competitively, while benefiting from early market entry.
For their larger counterparts, alternatives offer steady and predicable cash flows while helping diversify their portfolios.
Risk versus reward
However, these investment opportunities don’t come without challenges.
The specialised nature of alternatives means investors will need to spend more time understanding the drivers underpinning demand in order to achieve scale and efficiency, warns Wild.
Even then not all sectors will provide enough scale to make large investments viable. Child care centres and self-storage are an example, though they do provide private investors and syndicates that are being squeezed out of the core markets, a place to park their money.
Liquidity is another key risk factor, in that it can be difficult to judge the depth of future investment demand needed to form an exit strategy.
However, for early entrants in a new sector, a compressing yield premium over time will provide above average long term returns.
“The ride for investors may be challenging initially, but they just need to be prepared for this period and enter with a longer-term focus and informed strategies to control risks,” says Wild.
Click to read more about how alternative real estate in luring investors in Asia Pacific.