As competition tightens in core sectors in Australia, investors are looking to diversify into Alternative real estate for risk-adjusted returns.
In Australia, traditional real estate sectors will simply not create enough new assets to satisfy local and global investor demand.
It is, therefore, “inevitable that institutional capital will begin to seek new, or ‘alternative’ sectors,” says Leigh Warner, from JLL’s Research team in Australia. “Many alternative sectors also offer large investors stable and predictable cash flows, which can be counter-cyclical and less correlated with income streams from traditional real estate sectors.”
Investor and developer interest in the alternative sectors reflects the fact that capital markets
have been strong, resulting in intense competition in the traditional core sectors.
This strong competition among local and offshore institutional investors has pushed many private investors and developers out of core sectors. Consequently, for smaller investors and developers, alternatives represent an opportunity to be more competitive and, by being early adopters, put themselves into a strong position to capitalise when institutional money enters some of these markets.
For institutional investors, the pressure is to find new relatively safe sectors to place money in the currently competitive environment. Many alternative sectors offer institutional investors very steady and predictable cashflows, which is a very attractive characteristic. In addition, returns in some alternative sectors benefit from being less cyclical and much less correlated to core real estate returns. For very large investors, these characteristics mean that from a portfolio construction perspective, adding
them to a portfolio gives real diversification benefits. The great challenge for institutional investors is that the large amounts of capital they need to place means they need sectors where they can achieve scale and where they do not have to aggregate a large number of assets. Larger investors will also be very concerned about an exit strategy, so eventual market liquidity will be a major consideration.
So, where are the opportunities for both local and offshore investors and developers?
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