As competition tightens in core sectors, institutional investors are looking to alternative real estate to seek asset diversification and risk-adjusted returns, according to JLL.
In a recent report exploring why alternative investment sectors have become increasingly popular in Australia, JLL marks out the increases in institutional capital against the amount of available core property – and what the resulting opportunities are for investors and developers.
JLL estimates that the amount of capital flowing into Australian real estate will most likely grow 7.5%+ annually. The stock of core real estate investments, however, is predicted to grow, at best, 4-5% annually.
As a result, investors will have to either pay more for core real estate or go offshore.
JLL offers a third opportunity in response to this trend; investment in alternative institutional real estate. Being quite a broad term, ‘alternative’ ranges from retirement living, private hospitals, self-storage and data centres to renewables.
It also encompasses student accommodation, agriculture and the build-to-rent residential sector.
"The most likely outcome will probably be a combination of all three options, but we believe that there is little doubt that institutional investment will have to move into new sectors long-term.
“This will create opportunities for early movers (both institutional and private) to capitalise on this long-term trend, but investor need to realise it will not necessarily be a smooth ride at all times.” The report indicates.
JLL see this trend stretching into the long term due to the shortage of “asset creation in core sectors in the future that will necessitate the spread of capital into new frontiers.”
For large investors, one clear benefit to entering these alternative sectors is in genuine portfolio diversification, “if alternative sectors can be found that genuinely offer lower cyclicality, or slight counter-cyclical properties, then adding them to the portfolio can reduce overall portfolio volatility and enhance risk-adjusted returns.”
With movements in investment however there are inherently risks that need to be carefully deliberated.
- Understanding/Investing in the operational side of the business
- Political and regulatory factors can be very important
- Not all sectors will institutionalise, but niche is still an opportunity!
- Liquidity risks need to be managed
- Small sectors are exposed to volatility
With that being said, JLL plotted out some SWOT analysis’ that we highly recommend investigating. These cover such sectors as; Retirement Living, Aged Care, Private Hospital, Child Care, Self-Storage and Student Accommodation.
You can download the JLL Alternative Real Estate Report here