Cold storage facilities a long-term play in alternative property investment: M&G

ASSET manager M&G Real Estate expects cold storage to shine in the long run as investors, now flush with liquidity, hunt for alternatives in the Asia-Pacific property market.

Life sciences and data centres are also likely to continue to gain prominence, although the global investment manager advised discipline and caution before jumping into opportunities.

At a virtual roundtable on Wednesday, Jonathan Hsu, head of research for Asia at M&G Real Estate, said that cold-storage facilities, a type of specialised logistics property, are capex (capital expenditure) intensive, especially in hot humid climates like Singapore's.

However, such properties will become more important amid climate change and global warming. "We'll also need to store redundant medical or food supplies to survive future catastrophes," he noted.

Demand for cold storage may get "overwhelming", considering the increase in online shopping for groceries as well, he added.

Ultra-cold, specialised freezers saw a spike in demand globally before the roll-out of Covid-19 vaccines, which require complex and rigorous cold-storage requirements.

Richard van den Berg, fund manager of the M&G Asia Property Fund, likewise said that among the myriad alternative assets available, "we'll feel the most comfortable with cold storage".

More refrigeration, cooling or temperature-controlled products are being sold, and these typically require locations closer to residential city centres, he said. He projects this to be a long-term trend.

Also, from a risk perspective, the locations of cold-storage facilities are attractive for normal logistics buildings, so the only additional element an investor needs to put in would be the expenditure for the temperature-control features, said Mr van den Berg. This also means that if the cold-storage sector starts to underperform, investors can fall back on reverting the property to a pure traditional logistics use.

Mr van den Berg, who uses a core or long-term strategy for the M&G Asia Property Fund, emphasised the need to be "extremely disciplined" and "avoid style drift", which is when a fund diverges from its investment style or objective.

Meanwhile, Mr Hsu also sees potential in data centres and life sciences as alternatives with a good chance of becoming more established and mature over time.

Mr Hsu said that the Covid-19 pandemic has shown clearly that governments and the private sector around the world need to spend more on research and development (R&D) on medical treatments and vaccines; ongoing treatments for Covid-19 and its long-term health impact are still in development.

Demand for real estate suited for the life sciences industry - which encompasses biotechnology, pharmaceuticals and medical devices - is thus likely to grow as the public and private sectors pour more money into such R&D, in his view.

Regarding data centres, Mr van den Berg drew attention to their "very high risk", despite the attractiveness of technological innovations and countless new opportunities: "Ten or 20 years ago, we didn't know what computers would look like. Are the same developments and technologies in data centres going to be the same in the next 10 to 30 years?"

There is a possibility that data-centre investments made today might become obsolete in the next decade or so, he added.

So from a long-term investment perspective, extra care is required to ensure there is indeed a long-term prospect of such data-centre buildings maintaining their value, he said.

For more opportunistic investors looking for distressed assets, he suggested the retail and hospitality sectors, which have seen some price dislocations as a result of the coronavirus crisis.

Capitalisation rates have expanded for retail properties across the board, and the sector "is ignored" in general, Mr van den Berg said. "I think there will be some good opportunities to acquire good malls, almost throughout the world."

Hotels, which do not fit into core investment strategies due to the volatility of occupancy rates, could instead appeal to those seeking distressed assets. Border closures during the pandemic had decimated hotel demand.

"In the Asia-Pacific in particular, the tourism sector, including hotels, will see a strong recovery the moment people can travel. There's enormous pent-up demand," he noted.

José Pellicer, head of investment strategy at M&G Real Estate, reiterated: "If you want distressed assets, you've got to take risks that are not unsubstantial, and have to go into the unloved sectors or sectors with a lot of volatility."

That comes as the ample liquidity in the market, bolstered by low interest rates, has kept the value of high-quality assets largely stable. "In fact, in certain areas such as logistics, we've even seen price increases and compression of cap rates during Covid-19," said Mr van den Berg.