With yields steadily declining in Asian property markets – as with illiquid assets across the board – institutional investors are increasingly looking to more niche areas of real estate to boost returns on the back of various megatrends.

These include assets such as aged care or nursing homes, student housing, data centres, laboratories and co-working projects. Real estate development sites and forward sales of assets under construction are also growing in popularity as investors move to diversify their property portfolios.

“We are increasingly looking into alternative investment sectors in real estate,” said Rushabh Desai, Asia-Pacific chief executive of Allianz Real Estate, the property investment arm of German insurer Allianz. “Alternatives are best aligned to the emerging megatrends around demographic shifts, urbanisation, consumption, e-commerce and digitisation,” he told AsianInvestor.

Alternatives such as co-working, cold storage, data centres and student accommodation haven’t typically been part of the institutional investment spectrum in Asia until recent times, said Louise Kavanagh, Asia-Pacific head of real estate fund management at US asset manager Nuveen. “These types of alternative asset classes have merit if you’re trying to capture contemporary underlying demand trends within the individual markets.”

Moreover, areas such as student accommodation, senior housing and data centres tend to have a yield pick-up over the office market and tend to be defensive plays, noted Desai. “The slightly higher yields are an obvious attraction into these sectors, but our bread and butter remains core because that’s where the scale is.”

Desai said Allianz Real Estate favours student accommodation in Australia over the other asset types. The firm, which manages €40 billion ($48 billion) in property equity globally and is looking to double its Asia-Pacific allocation, said in late April it was raising a fund in partnership with student housing operator Scape Australia. The closed-ended vehicle aims to raise A$500 million (€315 million) to target the purpose-built student accommodation market in Australia.

Yields on alternatives such as data centres can range from 4% to 6% in Tokyo and Singapore, and 6% to 7% for Sydney, as compared to core office yields of around 2.5% in Tokyo and 4.5% in Sydney, according to a late March report by property consultancy JLL.

The top global buyers of alternative property are Reits [real estate investment trusts], equity funds, investment managers, real estate operating companies and developers, noted Rohit Hemnani, Asia-Pacific head of alternatives in the capital markets division at JLL, on the release of the report. Between them these five investor segments put $43 billion into the sector during 2016, he said.

“In Asia Pacific, we're seeing a similar trend of developers and private equity allocating more capital to alternatives," added Hemani. "Reits are especially active in countries like Japan for aged care."

Figure 1: Where investors are active or plan to be active in alternative real estate 
(Click for full view)

The shift in Asia towards niche real estate became more pronounced in 2017, said a PwC report published in November, ‘Emerging Trends in Real Estate Asia Pacific 2018'. Investors have been “increasingly willing to take a punt in areas they previously avoided due to the perception of higher risk or the need for specialist operational expertise”, it said (see figure 1 for the sectors they plan to be active in).

In respect of data centres, for instance, investors identified Hong Kong, China, India and Singapore as potential destinations, with projected internal rates of return of 13% to 15%, according to survey findings from the PwC report*.

Such an uplift in returns of course comes down to the greater challenges of investing in niche assets, for which help is needed from specialist partners.

‘BUILD TO CORE’

Another way of getting a yield boost or accessing a market where one can't otherwise find the right type of direct real estate asset, particularly for a core strategy, is the ‘build to core’ approach, Kavanagh said. This involves taking an option to purchase or committing to buy an asset with a view to capturing or underwriting income in the future.

“That’s a strategy I would employ in certain markets,” she noted.

Such strategies are becoming more popular, according to Real Capital Analytics (RCA). The volume of forward sales – those of property still under construction – jumped in 2017, with especially strong increases in Hong Kong, Singapore, and South Korea (see figure 2).

Figure 2: Forward sales of property in Asia (click for full view)
Source: Real Capital Analytics

‘Build to core’ can be a good approach in South Korea, noted one Asia-based property expert, on condition of anonymity. Seoul offers stable, income-producing assets, many of which are keenly sought by local asset managers and pension funds, making it hard for foreign firms outside that market to gain access.

However, local firms generally don’t want to take income risk by putting down a deposit or commiting to a forward purchase of an asset that’s being developed.

Unlike in other mature regional markets, South Korean tenants won’t generally pre-commit, so developments are often built without any sort of agreed lease terms prior to construction completion, noted the unnamed expert. This can give foreign investors a way into the Korean market. 

Moreover, development sites in general are attracting fast-growing volumes of capital. While acquisitions of income-producing property in Asia Pacific grew by 10% last year to $161.4 billion, purchases of development sites shot up by 41% to $644 billion, according to RCA.

* Respondents to the PwC survey included institutional investors (6.3% of the 600-odd individuals polled), fund managers (24.4%), developers (34.5%), property advisory firms (19.7%) and lenders (3.0%), among others. Some 97% of the respondents were based in Asia Pacific.

An extended feature on real estate investment in Asia Pacific will appear in the forthcoming April/May issue of AsianInvestor magazine.