Hipercept | The Growing Demand in Commercial Real Estate for Alternative Sub-Asset Classes

The Growing Demand in Commercial Real Estate for Alternative Sub-Asset Classes

The stable returns and appreciation offered by the Commercial Real Estate (CRE) asset class is helping to establish itself as the fourth pillar of an institutional investor’s portfolio. Within this asset class, there have historically been four main sub-asset classes; Office, Retail, Industrial and Multi-Family (residential). With an ever changing economic landscape affected by factors such as urbanisation, migration and technological advancement, investors are seeing opportunities in certain alternative sub-asset classes to return higher yields and more stable earnings.

So what are some of these alternative sub-asset classes and how will they affect your current processes and architecture to ensure your organisation is ready for the future?

Private Rented Sector/Build to Rent

The Private Rented Sector (PRS) sub-asset class, often referred to as Build to Rent, is an ever increasing market for institutional investors. Historically popular in the United States (30% of total housing stock is privately rented) and Germany (60%) [1], it is now gaining a lot more traction, especially in the UK, France and Asia Pacific. Institutional investors are attracted to PRS due to its capacity for stable returns, low capital costs and the ability to develop large scale portfolios. The rise of Real Estate Investment Trusts (REITs), especially in the US, which offer the benefits of a diversified portfolio under professional management, have also intensified demand. Furthermore, there has been a shift in social attitudes towards renting due to its flexibility. This, as well as the unaffordability of owning your own house, has also driven more focus to PRS.

Organisations that are currently investing in PRS developments, or looking to in the future, should be considering the following points when assessing their current processes and models:

  • Modelling and forecasting multi-unit income and costs
  • Monitoring and updating development costs and interaction with your development appraisals system
  • Retention or disposal of a completed PRS development

If you are still using Excel models, could they, no matter how complex they are, withstand a project demand such as a PRS development?

Student Accommodation/Senior Housing & HealthCare

Student Accommodation has expanded hugely in recent years. According to the Financial Times, the “sector has ballooned from a fringe investment 10 years ago to being a global market worth $200bn today. Growth has been underpinned by a rise in the number of students worldwide – 175m in 2014 from 98m in 2000” [2] As the graph below shows, the market is predicted to continue its rapid growth as more students go to university and more money is invested into higher education. With the number of students studying abroad also set to rise to 8m in 2025, from 4m in 2012 (mainly increasing from China and India) [3], there will be greater demand for this type of sub-asset.
globalinvestment

Similarly, Senior Housing and Healthcare Facilities have experienced an explosion in investment over the last decade. The Wall Street Journal has reported that “Investors are pouring money into buying and developing medical-office buildings and other healthcare related properties, a class of commercial real estate that has been outperforming almost all others since the Great Recession”. According to the National Association of Real Estate Investment Trusts, healthcare REITs have outperformed all other property types except for manufactured homes and self-storage facilities since 2007. [4]

With aging populations across the globe the demand for Senior Housing will only grow. Estimates from a UN World Population Aging report show that the proportion of the world population that will be over 60 will increase from 8% in 1950, 10% in 2000 to an estimated 21% in 2050. [5]

Is your organisation looking at Student Accommodation or Senior Housing/Healthcare Facilities? if so, you should be considering the following points:

  • Can your valuation models cater for the different methods required for these multi-let assets?
  • Will the differing data attributed to these assets fit into your current data models, e.g. healthcare details, profile of students etc.?

Logistic Hubs/Data Centres

Global disrupters such as Amazon, the emergence of “Big Data”, and exponential growth in Cloud Computing has caused a significant rise in Logistic Hubs and Data Centres as CRE investments, compared to the more traditional investments in industrial “Sheds”.

Corporations like Amazon, who traditionally use large distribution centres, have recently introduced Amazon Prime Now across the globe, offering a 1-2-hour delivery time to customers. This has led to the creation of smaller hubs dotted around the country to serve its customers more efficiently and effectively. With other major retailers and online web sites usually following a disrupter like Amazon, there is already more of a focus on smaller, leaner logistical hubs which in turn brings with it more of an investor focus. The smaller cost of capital and the potential for high yields associated with these smaller hubs are leading investors to consider such ventures, particularly as consumer demand is only going to increase in the future. In conjunction, there has also been a rise in click and collect and pop up areas within retail parks and in office complexes, which brings with it a greater commercialisation factor to be considered within these particular asset types.

Equally, Data Centres have seen a huge surge in demand in recent years due to the increase in Cloud Computing and the need to store data offsite for security purposes. Data creation itself is skyrocketing, and, according to IDC Digital Universe, the amount of data being created worldwide is scheduled to double every two years for the next decade (see below graph). [6]

picture1

Boston Consulting Group have estimated that there “could be investment opportunities worth €130bn as more companies outsource their data management – 20% of all data by 2016. These opportunities range from building new facilities and sale-and-leasebacks of existing premises, to buying operating businesses” [7]. These are becoming increasingly attractive assets for institutional investors due to being primarily large buildings occupied by Investment-Grade Tenants on long leases. There is a level of complexity in this asset class and you will need to understand the technical aspects of running and managing a data centre. However, demand will only increase due to the forthcoming Internet of Things (IoT) era, generating the need for more data centres across the world.

Are you considering adding these types of investments to your portfolio? If so, ask yourself this:

  • Are my models able to increase in size and scope at short notice, whilst also considering the adaptability of reporting required by stakeholders?
  • Are you factoring in commercialisation to your existing portfolio in your forecasts (Click & Collect/Pop Ups)?
  • Do you have the required skill set within your organisation to manage Data Centres? i.e. understanding mechanical and electrical components, data centre operations and how tenants would wish to deploy and manage their data centre portfolio now and in the future?

Conclusion

Considering these three “up and coming” asset types within the CRE industry and the focus that institutional investors will have on them, you will need to ensure you are operationally prepared to adapt and adopt to any changes that might affect your management of these assets.

As an organisation you do not want to be seen as behind the curve with outdated models and systems, unable to respond proactively to market trends or the needs of your investors.

Hipercept are industry experts in advising organisations to guide them to best practice and implementing solutions to enable them to be industry leaders. Click below to read about our previous business case studies and also to see how we could help you.

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References

[1] Promoting investment in private rented housing supply – International policy comparisons – Department for Communities and Local Government

[2] Financial Times – Student Housing is Top Property Asset https://www.ft.com/content/8c28a348-2691-11e2-9295-00144feabdc0

[3] Savills – Spotlight – World Student Housing – 2015-2016

[4] Wall Street Journal – Graying America, Health-Care Overhaul Boosts Medical Properties – 25/01/2015 – http://www.wsj.com/articles/graying-america-health-care-overhaul-boosts-medical-properties-1422386348

[5] UN World Population Aging Report – 2015 – www.un.org/en/development/desa/population/…/pdf/ageing/WPA2015_Report.pdf

[6] IDC EMC Digital Universe Study – 2014 – http://www.emc.com/leadership/digital-universe/index.htm

[7] IPE Real Estate Data Centres: Clouding the issue https://realestate.ipe.com/markets-/sectors/alternatives/alternatives-data-centres-clouding-the-issue/10004257.fullarticle

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