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Hitting the sweet spot for investors in Asia
ASK most investors and they'll tell you "bricks and mortar" represents a key part of their asset portfolio. For individuals, investing in property means owning the home they live in with the potential for capital upside as a bonus. For an institution, it's the opportunity to receive a steady yield from rent and also benefit from growth in capital value. It's a strategy that has worked for centuries and will continue to support millions of investors in the years ahead.
But as yields on traditional commercial assets such as offices and shopping malls have fallen in recent years, investors are tapping into the potential of alternative real estate assets. These are properties that are mostly built-to-suit such as student housing, education campuses, data centres and aged-care homes.
Although considered a niche investment class, in Europe and the US, alternative real estate has been on the rise for the past 15 years or so. In 2016, according to JLL research, some US$43 billion from real estate investment trusts (Reit), investment managers and private equity, among others, went into this asset class. In Asia-Pacific, interest in these alternative sectors is on the rise as investors seek out new markets to obtain asset diversification and enhanced risk- adjusted returns. Growth in the sectors is being driven by three mega-trends in this region: urbanisation, rising incomes, and a rapidly ageing population.
First, Asia is experiencing a surge in urbanisation. The urban population in Asia-Pacific is expected to rise by more than 400 million over the next decade – that's more than the entire existing population of the eurozone or the US. This links to the second mega-trend. As the huge and growing economies of China and India modernise, they are generating better paying jobs for their citizens, meaning that as more people move to cities, incomes are rising.
As a result, by 2030, the Organisation for Economic Co-operation and Development (OECD) estimates more than two-thirds of the world's middle class will reside in Asia, adding trillions to disposable incomes. This massive tier of professionals will want more homes, better education and services.
Third, Asia's population will rapidly age in the years ahead. Over the next decade, our research shows that the population aged 65 and above is expected to increase by 146 million – equivalent to 40,000 people per day – across the region. With families shrinking due to falling birth rates, specialised homes to care for their elderly parents will rise in importance. Nursing homes, hospitals and assisted living facilities will only grow in demand.
Key growth markets
These megatrends are already beginning to make an impact on real estate investments. Take education, for example. With rising incomes, the demand for good quality education has soared. In particular, English-medium pre-kindergarten to grade 12 international schools are becoming increasingly popular. While international schools used to serve the expatriate community, now the growth in demand is mostly coming from affluent locals who wants to provide a good head start for their children and pathways into top universities.
Strong demand comes from markets such as Malaysia, Thailand, Hong Kong and China, where locals are allowed to attend such schools and receive a higher standard of English education. Asian students have also been a large source for tertiary education globally which, in turn, supports the demand for purpose-built student accommodation in countries with good universities such as Australia.
Investment firms such as US private equity firm TPG and Singapore's sovereign wealth fund GIC have also entered the sector. Last year, TPG invested S$140 million to acquire Vietnam Australia International School, which has several campuses in Ho Chi Minh City. GIC has also recently acquired two blocks of student housing in Sydney comprising over 1,000 beds.
For developed markets such as Japan and Australia, the need to build aged care facilities will only continue to grow as the population ages. These range from independent living facilities to assisted-care homes and skilled nursing centres. Several Japanese Reits have been established to buy, develop and build these assets to meet the shortage of such homes. Other countries such as Malaysia and Thailand have also seen interest coming from private developers and operators to build such facilities due to increased local demand. The cultural aspect of living in nursing homes is slowly changing due to improved facilities and services.
Likewise, with Asia becoming the primary growth region for Internet use and cloud computing, data centres have emerged as a critical piece of infrastructure. On this front, Singapore and Hong Kong have emerged as two key regional hubs for data centre locations. As the three mega- trends converge – urbanisation, rising incomes and an ageing population – investing into the alternative sectors will provide direct access to the expected sustained growth. For forward-thinking investors, these relatively untapped sectors offer strong return premiums compared to traditional real estate. Estimated yields on alternatives such as data centres can range between 4 per cent and 6 per cent in Tokyo and Singapore, and between 6 per cent and 7 per cent for Sydney. In contrast, core assets such as office buildings generate around 2.5 per cent in Tokyo while shopping malls command approximately 5 per cent in Australia.
In addition, the operating leases of alternative assets are often in excess of 20 years. This provides a stable income stream and can help investors diversify their portfolios by adding different types of tenants or increasing exposure to a new sector. But while the benefits are compelling, there are a number of barriers to entry. Typically, aged care and data centres are highly regulated by governments so compliance 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 be a challenge. The other consideration for many investors is access. Investing in alternative real estate is not as accessible as, for example, buying into the residential market. But the good news is that accessibility is growing. Private equity firms have been increasingly offering alternative real-estate investment options to investors. There is also the option to look at leveraged buy-outs by co-investing with other investors.
Other mainstream choices include Reits, which offer a simple investment platform. There are already several listed Reits in Singapore, Japan and Hong Kong that focus specifically on data centres, hospitals and private education. These include Singapore-listed Keppel DC Reit for data centres and Japanese Nippon Healthcare Reit, which builds and invests in healthcare facilities for the elderly.
As Asia transforms, the demand for certain types of real estate will grow in tandem. For investors taking a long-term view, thinking about alternatives to traditional bricks and mortar could be a smart move.
The writer is COO and Head of Alternatives, Capital Markets at JLL Asia Pacific.