Alternative real estate sectors luring investors in Asia Pacific

Investors in Asia Pacific are looking beyond offices and shopping malls for the next big thing.

April 05, 2018

Demand is shifting toward historically less-trodden areas of the property market that offer superior returns, something that has become increasingly important to property investors facing record-low yields around the world.

These alternative sectors include properties like data centres, student housing, self-storage, education and senior housing.

While investing in these properties can come with hurdles, robust returns and long-term stability are drawing interest across the region.

Last year, U.S. private equity firm TPG invested US$140 million in the Vietnam Australia International School, which has campuses in Ho Chi Minh City. Singapore’s sovereign wealth fund GIC bought student housing blocks in Sydney from Frasers Property Australia and Sekisui House Australia for A$400 million.

“Although Asia Pacific’s alternative real estate market is still relatively immature compared to Europe and the United States, interest is growing fast,” says Rohit Hemnani, COO and Head of Alternatives, Capital Markets, JLL Asia Pacific.

A key driver of the demand: the region’s broader fundamentals such as urban growth, the broad adoption of the Internet and an ageing population, where those aged 65 and above are projected to increase by 40,000 people per day over the next 10 years, according to a JLL report on the alternatives sectors.

Lure of strong returns

Alternatives sectors typically offer stronger returns than more traditional real estate. While the range can vary, estimated yields on alternatives, such as data centers, sit anywhere from five to eight percent in Tokyo, Sydney and Singapore, representing a healthy spread compared to traditional asset classes.

Regional demand drivers

It’s not just returns. Stability is a factor.

Operating leases of aged care homes, schools, and data centers often extend over 20 years, providing a stable income stream that lessens the impact of market volatility.

Clearly, different countries present different opportunities. Education and student accommodation sectors are well-positioned to grow in Australia, China, India and Southeast Asia, Hemnani at JLL says.

The rise in ageing population means that the senior housing market will fare well in Japan and China, he says.

Despite the potential, Hemnani highlights that there are high barriers to entry.

“Typically, aged care and data centers are highly regulated by governments so managing them in accordance with local laws can be demanding,” Hemnani says.

“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,” he says.

Why is alternative real estate a long term strategy?