Are Alternative Assets the Next Big Thing in Real Estate?

HONG KONG, April 8, 2018 – Investors are increasingly turning to alternative real estate sectors to take advantage of their attractive yields and long-term growth prospects in Asia Pacific, says property consultancy firm JLL.

In the first of a six-part research series focusing on 'The Rise of Alternative Real Estate in Asia Pacific', the report defines alternative sectors as non-traditional real estate assets such as aged care or nursing homes, student housing, education, data centres, self-storage facilities and laboratories.

"Globally, Asia Pacific's alternative real estate market is still relatively immature compared to Europe and the U.S. but interest is growing as investors continue to seek out new sectors to diversify assets and enhance returns," says Rohit Hemnani, COO and Head of Alternatives, Capital Markets, JLL Asia Pacific. "The way alternatives are structured presents a long-term operating lease, which provides a stable income stream and decreases market volatility."

According to JLL, estimated yields on alternatives such as data centres can range from 6 to 7 per cent in Tokyo and Singapore, and 4 to 6 per cent for Sydney. By contrast, those for core assets such as office buildings can generate around 4.5 to 5 per cent in Tokyo and 2.5 to 3.5 per cent in Sydney, while shopping malls can command approximately 4.5 to 5.5 per cent in Tokyo and around 2.5 to 4 per cent in Sydney.

Hemnani adds: "The top global buyers of alternatives are REITs, equity funds, investment managers, real estate operating companies and developers. In 2016 alone, these five groups of investors put over US$43 billion into the sector. In Asia Pacific, we're seeing a similar trend of developers and private equity allocating more capital to alternatives. REITs are especially active in countries like Japan for aged care."

The report explains that the outlook for alternatives in Asia Pacific is positive and will continue to gain momentum due to broad demographic shifts such as urbanisation, an ageing population, as well as the region's rising household wealth and increasing use of technology.

Asset classes like education and self-storage facilities will stand to benefit from the growth of the urban population in Asia Pacific, which will account for over 400 million people by 2027. Rapid adoption of smart phones, cloud computing and the Internet of Things will drive a surge in demand for data centres, bolstered by an additional 560 million internet users over the next decade in the region.

Meanwhile, the region's ageing population will rise by an additional 146 million people within the next 10 years, contributing to the expansion of senior housing and nursing homes.

The challenge ahead

Despite these strong demand drivers, there remain a number of barriers to entry. Typically, aged care and data centres are highly regulated by governments so managing them in accordance with local laws can be demanding. In Asia Pacific, the various alternative sectors sit across different levels of maturity, so understanding market fundamentals and operational capabilities can also pose as a challenge. However, it is evident that significant opportunities exist.

Hemnani explains: "With urbanisation rapidly growing across the region, international schools in Asia Pacific are forecast to multiply by three to four times to meet a target of 10 million students over the next 15 years. This will boost the education and student accommodation sectors that are well-positioned to grow in Australia, Mainland China, Hong Kong, India and Southeast Asia."

"Similarly, the rise in the ageing population means that the senior housing market will fare well, particularly in Japan and Mainland China, as these markets provide enormous potential for growth."

Denis Ma, Head of Research at JLL, said: "In Hong Kong, record high prices and ultra-low property yields are driving an increasing number of investors to take a closer look at alternatives in the local real estate market. These include student housing, senior housing, co-living, education, self-storage, car parks and data centres. For investors, alternatives can often generate rental yields 100-200 basis points higher than more traditional real estate assets."