Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 420

Five megatrends driving the Liquorice Allsorts of real estate

Urban Dictionary describes ‘Liquorice Allsorts’ as something that has many different varieties and assortments. It is a perfect description of the alternative real estate sector that continues to grow in importance as investors adapt to its uniqueness. We take a look inside the box to see what shapes and flavours are on offer in the real estate universe.

How real estate is evolving

Let’s first take a history lesson on market evolution to date as many investors are yet to implement this evolution in their real estate exposure. History shows that investors who ignore evolving trends are doomed to holding portfolios dominated by yesterday’s heroes.

The top five names of the 1980s – IBM, Exxon, General Electric, AT&T and General Motors – are nowhere to be seen at the top of the S&P500 today, replaced by the likes of Apple, Microsoft, Facebook and Google.

Investors that ignored the evolution of the economy and the rise of industries, such as Big Tech, would have been left holding companies in relative decline.

Why should it be different in real estate? It’s not.

Today, Australian real estate investment is dominated by the same types of assets that have informed asset allocation decision-making in super funds for decades. Using unlisted property exposure as a proxy for institutional ownership, it’s clear that office and retail leads allocations in unlisted real estate funds among Australian institutional investors. Industrial property (growing fast) makes up much of the rest.

Forward-thinking investors have been recalibrating their portfolios and we believe there remains a long runway from here.

They are watching the changes that occur in the economy, in particular the evolution of technology, generational and demographics trends, and relating this to the underlying real estate demand.

Source: Real Investment Analytics. As at 31 December 2020

The emerging asset class of alternative real estate will define the property industry over coming decades as both fast and slow-moving global trends, including the continued dependency on technology, advances in healthcare and an ageing population, combine to create sweeping demand shifts on the property industry.

What is alternative real estate and where does it fit?

There is no universally agreed definition of alternative real estate, except that it sits in the other bucket that is not traditional real estate of office, retail and industrial.

By using the slogans of some of the biggest commercial landlords in the world and also adding our own twist, alternative real estate can be summed up by this five-word summary: beds, sheds, meds, bytes and life.

Simply put, this means the cohort comprises:

1) shelter such as build-to-rent and student housing (beds)

2) logistics including last mile – not strictly alternative but it has most certainly evolved from what the demand/supply dynamics of industrial once were (sheds)

3) healthcare, aged care and life sciences (meds)

4) data centres and telecommunications (bytes), and

5) property assets servicing changing consumer needs which are ‘everyday life’ in nature, including self-storage, agriculture and childcare (life).

It’s a Liquorice Allsorts of assets but it is growing rapidly, driven by unstoppable underlying economic and societal forces.

In the US, alternative real estate assets already dominate portfolio allocations making up 55% of the REIT index composition. We believe Australia, NZ, Europe and the UK remain at the early phase of this powerful real estate evolution, with Asia not likely far behind.

Blockbuster vs Netflix

Not so long ago, the only way to watch a movie at home was to rent a hard copy on video tape from a local retail store. In 2004, the US leader in movie rental was Blockbuster, a household name with more than 5,600 physical shops across the nation’s strip malls and main streets. Effectively, the retail sector had a lucrative monopoly on movie rentals.

Fast forward to today and Blockbuster has one just store remaining open globally, stubbornly clinging on as a nostalgic memory of a different time.

The difference, of course, was technology harnessed by Netflix, which started with mail order DVDs and rapidly built a market-leading streaming service. The underlying story is technology and the disruptive real estate that facilitated the change.

Datacentres and, more recently telecom towers, offer two key examples of alternative real estate assets that dominate the US listed markets.

A dormant giant in Australia

Alternative real estate might only be a small part of the property industry in Australia today but on fundamentals it looks like a dormant giant.

Real estate investment is fundamentally a question of the interplay between supply and demand along with the contractual lease terms between landlord and tenant. Alternative real estate offers a higher yield than traditional real estate sectors, which means on average, investors are earning a greater spread over the risk-free rate.

At the same time, investors also enjoy considerably longer lease terms on average in alternatives, helping confidence in the security of cashflow.

Source: Real Investment Analytics. As at 31 December 2020

The mega trends

We believe five megatrends are driving the growth of alternative real estate.

1. Technology

Technology, specifically data, is being referenced as the fourth industrial revolution. The growth numbers in this segment of the economy are mind blowing. Here’s a download of some stats:

  • There will be 1 trillion devices connected to the internet by 2030
  • By 2023, mobile phone users will have downloaded 299 billion apps
  • Between 2020 and 2023, business will invest an estimated US$6.8 trillion in digital transformation.

This digital economy creates immense economic value. Artificial Intelligence and 5G networks will make up an estimated $13 trillion contribution each to the global economy by 2030 and 2035, respectively.

But the continued growth of technology also creates another form of value – data. Internet traffic is forecast to hit 7.2 petabytes per second at peak times by next year. To put that into perspective, that’s five times higher than 2017 and equivalent to nearly 2 million movies being uploaded and downloaded every second.

Source: Statista Digital Economy Compass 2019

This data needs to be stored securely and accessible with minimal latency from somewhere and that need is fuelling the growth of data centre real estate demand. A widely used line is “data is the oil of the 21st century”. If that’s accurate, our question is who will be the John D Rockefeller of data?

2. Demographics

The world is experiencing a rapidly ageing population. Dubbed the ‘Silver Tsunami’, the number of individuals aged 60 years and above will double by 2050. In the US, 10,000 people will turn 65 every day – a statistic that will hold true every day through to 2030, filling the MCG every 10 days.

As people age, their needs change, driving demand for aged care, healthcare and hospitals and retirement living. Of particular interest in this sector is the growth of the manufactured housing sector.

Manufactured housing is a way to build retirement and lifestyle communities that offer more space and lower prices than traditional housing, specifically designed to come with community and lifestyle benefits for an ageing cohort. They are modern, low maintenance homes often in resort-style settings with swimming pools, tennis courts, bowling greens and even marina berths, all at a lower price point than a standard rental dwelling. 

3. Life science

The ageing population, a renewed focus on fighting global disease and an increasingly health aware society is also driving the opportunity for alternative real estate assets in the life sciences, which aims to treat disease, extend life expectancy and improve human health outcomes.

The life science market has been at the forefront of all our minds recently as the industry races to solve the COVID-19 pandemic. We are proud to be invested in companies that provide the space for the firms developing the most promising COVID vaccines like Pfizer, Moderna and Johnson & Johnson.

But the opportunity in life sciences will last well beyond the current pandemic. Some 10,000 diseases plague humanity, of which approximately 500 have been addressed with medical treatments.

This creates an incredible runway of growth for the life sciences industry and underpins the real estate fundamentals of this alternative real estate asset class. Life science has been the real estate market darling in the US for many years and is growing fast in Europe and the UK, with a growing interest here in Australia.

4. Food security

Source: Food and Agriculture Organization of the United Nations, OECD Stat. As at 30 June 2021.

Since 1961, the global population has more than doubled. Arable land, i.e. land that can be used for agricultural purposes, has remained relatively fixed, however, the water used to irrigate these lands have become scarce.

This has significant implications for farmers as relatively fixed land supply, dearer water and a growing demand for various foods has meant a requirement to do more with less. As a result, Australian farmer productivity and efficiency has had to increase substantially to meet a hungry global economy.

Additionally, water markets have had to advance to create greater efficiencies and ensure farming operators have the water necessary to effectively irrigate their crops; the onset of the water entitlement market in Australia has supported this and means operators can buy perpetual rights to an exclusive share of a water resource they need.

A real example of these trends can be seen in the cattle industry. Meat consumption over the last 20 years has more than doubled. Efficiencies in Australian cattle operations have had to increase substantially as a result and, because of these productivity increases, the value of agricultural land has benefited tremendously.

Farmland values have increased some 12.9% over the last year and 10.6%(CAGR) over the last five years, reflecting a willingness by farmers to pay more for productive farming operations.

With its competitive advantages in operations of cattle, nuts, vineyards and other cropping areas, Australia is well placed.

5. Everyday life

Alternative real estate assets are also benefiting from changes in everyday life in the western world, including rising demand for child-care and rental housing. However, we believe the standout opportunity in this space is self-storage.

The idea that households or small business might need somewhere to store their excess possessions and inventory is a relatively new phenomenon, but it is being driven by four seemingly unstoppable secular trends known as the ‘dreaded four D’s’ – death, divorce, downsizing and dislocation.

Source: Public Storage Investor Day, May 2021.

These life events mean the self-storage industry is somewhat insulated from certain economic cycles. It also benefits from its historical fragmentation, allowing larger players to buy smaller operators at reasonable prices and improve the efficiency of returns by introducing better technology to optimise operations.

How do you use real estate today and how different is that to yesterday?

The societal and economic trends sweeping the world are a reminder of how the real estate market is evolving. These trends impact all aspects of our lives and real estate is no different. It must grow and change in response to the needs of society.

These are exciting times for listed real estate which not only offers exposure to these underlying trends but does so in a way that offers liquidity for investors with assets that are traded on public stock markets five days a week around the world.

Alternative real estate has come to dominate REITs in the US. Will the ‘Liquorice Allsorts’ box of opportunity do the same in Australia?

 

James Maydew is Head of Global Listed Real Estate at AMP Capital, a sponsor of Firstlinks. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. For a list of sources and important disclaimer information, see the here.

For more articles and papers from AMP Capital, click here.

 

RELATED ARTICLES

A-REITs offering much-needed income

Investing in commercial property

banner

Most viewed in recent weeks

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Part 2: Hamish Douglass on not swinging for the fences

Markets don't seem normal, but Magellan is criticised for its caution. Higher interest rates to control inflation could create a recession and some of today's investing will turn out a mass delusion of modern history.

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Latest Updates

Investment strategies

Despite the focus on ETFs, unlisted funds still dominate

ETFs gain the headlines as issuers are skilled at promoting their growth and new funds. Yet ETFs are tiny compared with managed funds, which advisers prefer on platforms. Which will be the long-term winner?

Latest from Morningstar

10 lessons from Larry Fink's 2022 Outlook

At a 2022 Outlook event, the influential BlackRock (largest fund manager in the world) CEO spoke about consumer behaviour and its impact on prices, the pandemic, ESG trends and likely equity returns for 2022.

Strategy

If rising inequality leads to social unrest, we all suffer

Feeling financially stressed? The entry level for the world's richest 1% is $1.5 million including the family home. If this is not enough to fund a ‘comfortable’ lifestyle, consider that 99% of people have less.

Shares

Sharemarket falls: seven things for investors to consider

Stockmarkets have fallen in recent weeks on the back of worries about inflation, monetary tightening, Omicron disruption and the risk of a Russian invasion of Ukraine. It’s too early to say markets have bottomed.

Retirement

The importance of retirement 'conditions of release'

Retirement 'conditions of release' vary by age in stages before 60, over 60 and over 65. Super tax benefits may accrue if gainful employment ceases after age 60 but a person may still return to the workforce.

Investment strategies

We need to limit retail investor harm from CFDs

A Contract for Difference (CFD) is a highly-leveraged investment used for speculative and gambling activities by retail investors without the knowledge to take such risks. ASIC is struggling to control the product.

Superannuation

It's time to assess your super fund’s carbon footprint

We face a huge economic transformation that is not a priority for politicians. Yet a typical super portfolio emits about 28 tonnes of CO2 per annum through its equities ownership, more than the average household.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.