Updated: May 3
Anyone active in the market knows everything is interconnected. Right now, technological and social change is underway—health care is experiencing accelerated growth, flexible and remote workspaces are undergoing a mass reimagination, and e-commerce and digital solutions are driving our economic recovery. The demographic shift toward an increasingly elderly population argues a strong case for investing in senior facilities. Health is driving the market and investors who are able to support smart portfolio acquisitions with high-level health and safety operations will see outsized returns in the alternatives market.
Listed below are six of the hottest alternative real estate asset classes, which are gaining attention from institutional investors worldwide.
1) Co-working Offices
2) Student Housing
3) Data Centers
4) Senior Care Homes
6) Cold Storage
How can these forces sustain or increase demand in the long term?
As reported by Colliers, a global real estate consultancy, in April 2019, there are over 15,000 co-working locations worldwide. Co-working offices offer a more flexible solution to freelancers, entrepreneurs, and organizations, compared to traditional office spaces. The co-working office owner or operator provides a full suite of services, including concierge-level support, conference rooms, health club facilities, food & beverages, internet, and copier/printer facilities. They also offer flexible lease terms in terms of tenure and capacity, which may be beneficial for tenants that are scaling or where only a small number of employees require a desk space at any given time.
JLL estimates that students in higher education will increase from 165 million in 2011 to 263 million by 2025. The bulk of these enrolments comes from China and India, where an increasing number of parents prefer to send their children to prestigious overseas institutions.
The fact that typical student housing schemes in tier 1 universities accommodate as many as 50 nationalities offers good diversification to investors. Rental income originating from a wider spread of countries reduces the risk of a downturn if the domestic markets are not doing well. In fact, the sector can prove counter-cyclical during economic downturns, with higher education enjoying greater appeal during periods of lower employment.
The amount of data flowing through our daily lives is booming. Every second, Google processes more than 40,000 searches. Every minute, there are 16 million texts sent around the world. Every day, more than 300 million photos are uploaded to Facebook. 2.5 quintillion bytes of data are created each day.
The number of people using the internet has grown from 1 billion people in 2005 to 3.9 billion in 2018, according to Statistica, an online market research firm. As per some estimates, more than 90 percent of the data in the world was created in the last two years. Data usage is accelerating faster than places to store the data. The global revenue for the data center market is growing at a 16 percent compound annual growth rate and is expected to reach USD 60 billion by 2020, according to Structured Research.
Data centers present a compelling investment case. The above-mentioned demand drivers for data mean the sector is less impacted by the traditional real estate cycle. The business itself benefits from a high degree of stability as well. Data centers equipment has to be deployed and tested, so once it is commissioned it cannot be conveniently shut down and ported to a different location. That makes it harder for users to leave once they have deployed. Long-term operating leases of data centers ensure a stable income stream for investors. However, construction costs are significantly higher than for a traditional warehouse or office building.
Senior Care Homes
Emerging global demographic trends make a strong case for investing in senior care facilities. As reported by Colliers in May 2018, advancements in healthcare, along with rising wealth levels, have increased life expectancy in Asia. The result is that the region’s senior (aged 65 and above) population will nearly triple by 2050 to 945 million. The number of people aged 75 and above (needing some sort of assistance in their daily lives) will jump from 137 million to 437 million over the same period.
In developed markets such as the US, the baby boomers (demographic category of people presently aged 55 to 73) already form the largest population category. While these baby boomers are still largely active and too young for senior care (average age of senior care residents is estimated at 83 years), they will increasingly be in need of such facilities in the decades to come.
Senior care facilities are an attractive investment and potentially offer higher and more stable returns than many other real estate asset classes. Senior care homes entail long-term rental terms. This offers an attractive proposition for long-term, income-focused investors. This is in contrast to the office sector, where tenants, driven by developments such as co-working, are increasingly demanding more flexible rental terms with shorter leases. Additionally, investment in senior housing provides diversification because the sector is not as cyclical as other real estate classes, as the demand is driven by broader demographic trends instead of economic activity.
About a third of self-storage customers are commercial, with start-ups, small businesses, and online retailers using the space as a flexible solution for stock overflow as well as product distribution.
In the highly-dense cities of Asia, where homes are getting smaller, self-storage facilities are becoming more and more popular. Vastly urbanized cities such as Hong Kong, Singapore, and Tokyo have an average home size of less than 800 square feet, and people are turning to self-storage as an overspill for their possessions.
Demand for self-storage, similar to conventional real estate classes, is driven by economic and demographic forces. Urbanization is an important driver for the sector as larger urban populations mean smaller living spaces in cities and more renters, who move house more frequently than homeowners.
As per a recent report from JLL, available cold storage space is on the decline, as a number of factors, such as the rise of E-commerce and grocery delivery services, have increased demand in the sector. Growing global trade of perishable goods such as meat and dairy, driven by the burgeoning middle-class segments in an emerging market, has pushed demand for temperature-controlled storage.
In July 2018, the US Department of Agriculture (USDA) reported that 2.5 billion pounds of chicken, turkey, beef, and pork was stockpiled in cold storage in the US, the largest on record. This was partially a result of fresh tariffs introduced by China and Mexico on meat imports from the US, lowering the demand for these imports.
The 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. Currently, there is very little transactional activity in alternative real estate markets beyond North America and Europe.
However, in the APAC region, investments in these alternative assets seem to be rising.
As the Asia Pacific enters the late stage of the economic growth cycle, real estate investors are increasingly emphasizing asset diversification and stability of income as their criteria move beyond traditional yield-based performance. Alternative sectors such as data centers, senior care homes and self-storage are gaining popularity among investors seeking income stability and higher returns, as well as a new dimension of enhanced returns from direct or indirect operational involvement.
However, the relative immaturity of alternative assets in the region poses a challenge for investors seeking to conduct due diligence and appraisals of property values. Many types of alternative assets have a brief history as an investment class, meaning that transaction records are limited. Cashflow can often be opaque, making it difficult to benchmark rents, income, and other operational data.