Article | Intelligent Investment
Alternative assets: What you need to know about this $100 billion investment market
From data centres to healthcare, Phil Rowland and Sameer Chopra provide their expert overview on Australia’s alternative asset class.
September 5, 2024
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The rise of the alternative asset class is here, and it comes with a substantial investment market worth $100 billion in Australia.
While this may pique the interest of many investors, reaching scale in this burgeoning market also comes with a precautionary side note.
“If you want to hit scale in alternatives, it's a bit more challenging. There'll probably be room for only two or three participants to gain an efficient position in each of these alternative sub-sectors, at least over the next three to five years,” explains Sameer Chopra, CBRE Asia Pacific’s Head of Research.
This vital observation comes via the latest episode of Talking Property: The House View, a quarterly podcast series tackling commercial property’s most crucial issues with expert insights from Chopra alongside CBRE’s Australia and New Zealand CEO, Phil Rowland.
Their most recent analysis looks at what’s driving this demand for alternative assets alongside the growth potential of alternative assets like data centres and healthcare centres.
In Australia, alternatives remain one-tenth the size of the core commercial property asset classes, the latter of which is a collective $ 900 billion investment market. This is where the challenge of scalability for alternatives currently exists. Regardless, there is still scope for acquisition activity to consolidate the market over the coming years, particularly if construction costs delay new supply.
“It also ranks seventh globally in terms of net absorption,” adds Chopra.
“If you think about rents, which in data centre land is measured in kilowatt-hours, they are increasing at levels of about 20% in the U.S, 5% in Europe, and broadly stable in Sydney.”
For global pricing, Sydney, which is considered a large data centre market, ranks in the mid-range with U.S pricing approximately 25% cheaper.
“Sydney has good availability right now, which is attracting these global cloud providers. This availability should also attract clients who are looking at AI computing, but power accessibility remains a real global challenge and that's affecting development timelines,” says Chopra.
It’s a point which leads into the investor realm of renewable energy. Rowland says that there's much to consider around energy transition pathways as data centres, real estate electrification, and electric vehicles place a huge demand on the country’s existing grids.
“This is leading a number of clients to explore real estate related ideas to get exposure to energy thematics, whether it be owning solar farms, wind farms or battery sites.”
"Aging and population growth are the two tailwinds for the healthcare sector, which now counts for 1 in every 6 jobs in Australia,” says Chopra.
“Another positive driver for the sector is Australia is not oversupplied with hospital beds compared to other developed countries. We have about 3.8 beds for every 1,000 people in Australia where in most other developed markets, the average is 4.3 beds for every 1,000 people.”
While clients have traditionally gained exposure to healthcare by investing in hospitals, research facilities, medical offices, medical centres and pathology labs, new opportunities are emerging in the form of healthcare precincts. This is being encouraged by a unique situation where significant investment is coming from the government to redevelop public hospitals – a move which can seed opportunities to build out large-scale public-private precincts.
“A precinct would typically include a public hospital, a university, a private hospital, and a few specialist hospitals such as an oncology centre or an eye hospital. You can have medical offices that have consulting suites in them, path labs and you can expand into areas like essential worker accommodation, car parking and amenities. It's almost like a mini suburb,” Chopra says.
The one condition that's required to maximise the precinct’s success?
“You really need to build deep relationships with all the stakeholders, hospital operators, and the government. It all takes a big investment of time,” adds Rowland.
Want to know what type of properties investors are already on the hunt for? Listen to the podcast now to find out.
While this may pique the interest of many investors, reaching scale in this burgeoning market also comes with a precautionary side note.
“If you want to hit scale in alternatives, it's a bit more challenging. There'll probably be room for only two or three participants to gain an efficient position in each of these alternative sub-sectors, at least over the next three to five years,” explains Sameer Chopra, CBRE Asia Pacific’s Head of Research.
This vital observation comes via the latest episode of Talking Property: The House View, a quarterly podcast series tackling commercial property’s most crucial issues with expert insights from Chopra alongside CBRE’s Australia and New Zealand CEO, Phil Rowland.
Their most recent analysis looks at what’s driving this demand for alternative assets alongside the growth potential of alternative assets like data centres and healthcare centres.
Understanding growth potential in alternative assets
The evolving state of today’s wider alternatives sector means that the definition itself can vary to include different asset types. For CBRE, the alternatives sector classes that clients are currently focusing on include data centres, social infrastructure, healthcare, life science, agribusiness, energy and renewables.In Australia, alternatives remain one-tenth the size of the core commercial property asset classes, the latter of which is a collective $ 900 billion investment market. This is where the challenge of scalability for alternatives currently exists. Regardless, there is still scope for acquisition activity to consolidate the market over the coming years, particularly if construction costs delay new supply.
Data centre demand
Data centre inventory has grown globally by approximately 20% to 25% year-over-year in 2024. There are consistent growth patterns across different global geographies with Sydney currently ranking fifth in regard to the size of the city's data centre inventory.“It also ranks seventh globally in terms of net absorption,” adds Chopra.
“If you think about rents, which in data centre land is measured in kilowatt-hours, they are increasing at levels of about 20% in the U.S, 5% in Europe, and broadly stable in Sydney.”
For global pricing, Sydney, which is considered a large data centre market, ranks in the mid-range with U.S pricing approximately 25% cheaper.
“Sydney has good availability right now, which is attracting these global cloud providers. This availability should also attract clients who are looking at AI computing, but power accessibility remains a real global challenge and that's affecting development timelines,” says Chopra.
It’s a point which leads into the investor realm of renewable energy. Rowland says that there's much to consider around energy transition pathways as data centres, real estate electrification, and electric vehicles place a huge demand on the country’s existing grids.
“This is leading a number of clients to explore real estate related ideas to get exposure to energy thematics, whether it be owning solar farms, wind farms or battery sites.”
Healthcare for the future
Australia's healthcare spend was approximately $260 billion in 2023 and it’s estimated to grow by 3.5% per annum over the next five years - a figure which outpaces Australia’s GDP forecast."Aging and population growth are the two tailwinds for the healthcare sector, which now counts for 1 in every 6 jobs in Australia,” says Chopra.
“Another positive driver for the sector is Australia is not oversupplied with hospital beds compared to other developed countries. We have about 3.8 beds for every 1,000 people in Australia where in most other developed markets, the average is 4.3 beds for every 1,000 people.”
While clients have traditionally gained exposure to healthcare by investing in hospitals, research facilities, medical offices, medical centres and pathology labs, new opportunities are emerging in the form of healthcare precincts. This is being encouraged by a unique situation where significant investment is coming from the government to redevelop public hospitals – a move which can seed opportunities to build out large-scale public-private precincts.
“A precinct would typically include a public hospital, a university, a private hospital, and a few specialist hospitals such as an oncology centre or an eye hospital. You can have medical offices that have consulting suites in them, path labs and you can expand into areas like essential worker accommodation, car parking and amenities. It's almost like a mini suburb,” Chopra says.
The one condition that's required to maximise the precinct’s success?
“You really need to build deep relationships with all the stakeholders, hospital operators, and the government. It all takes a big investment of time,” adds Rowland.
Investor tips for 2024 and 2025
As investors consider positioning for the second half of the 2024 calendar year heading into 2025, the experts are adamant on highlighting one key message: Returns tend to vary significantly during a period of interest rate change.Want to know what type of properties investors are already on the hunt for? Listen to the podcast now to find out.