By Nick Browne, director and founder at Jameson Capital, an Australian based alternative asset management fir
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The widespread impact of the COVID-19 pandemic has investors re-examining opportunities with fresh eyes, and one class drawing more attention than ever before here in Australia is alternative real estate.
A booming category in the US, it has been relatively underplayed here, where alternatives traditionally account for only about 10 per cent of the listed real estate market. But with investment staples such as commercial real estate being hit hard by the work-from-home trend, and retail malls and shopping strips squeezed further by the explosion of online shopping, savvy investors are looking for opportunities in non-traditional classes either unaffected by the pandemic or poised to exploit new post-COVID opportunities.
As someone who specialises in identifying future trends in the Australian property market, a number of alternative categories show significant potential to present strategic opportunities to investors willing to look beyond historically popular options. It’s worth noting that in the US, alternatives make up around 50 per cent of listed real estate market investments, so the Australian market is poised for growth in this area.
And because Australia has been less materially impacted by COVID than many comparable European, Asian and American economies, investing here is something we’re happy to recommend to our offshore investors. Prior to the onset of the COVID crisis in Q1 2020, it was more than 28 years since the last technical recession in Australia, which was the longest run of uninterrupted GDP growth in the developed world; so it’s also a very resilient economy.
Let’s start with some of the mainstream options that we consider have been detrimentally impacted by COVID-19. It’s no secret that retail strip shopping and malls have been hit by a lack of foot traffic and some businesses, especially in hospitality such as cafes and restaurants, have been unable to transition to e-commerce. Similarly, hotels and pubs are not performing as well as they previously have done due to density restrictions and reduced flow of business patrons and tourists. Aged care is another challenged sector, with the impacts of COVID-19 and various investigations into mismanagement obviously impacting confidence in the sector, leading to a dramatic fall in short-term demand.
And whilst existing holdings in office buildings are for the time being maintaining paper valuations in anticipation of people returning to work in CBDs around the country, it is too early to have a clear understanding of what structural changes have already taken place, to how and (more importantly) where Australians will be working going forward. So, what else is worth a look in terms of alternate classes of real estate investment?
Industrial distribution centres – people are sitting at home ordering on Amazon. Those goods need to arrive off a ship somewhere, be repackaged or parcelled, and then sent to someone else. That one has already taken off. Inner-city last-mile logistics is closely related, and another one that’s doing well on a smaller scale, offering opportunities to investors other than the large-scale listed players.
Data centres – everyone needs data, whether it’s video conference calls, learning from home or ordering consumer goods online. We need bandwidth and we need our data stored. That has made data centres a very popular area to invest in.
Self-storage – with the government’s HomeBuilder grant plus extra disposable income from a lack of holiday travel, Australians are getting busy renovating and updating their existing homes. Downsizers moving from homes to apartments has been a major trend in our cities and has boosted demand for the self-storage industry and associated real estate assets.
Agriculture and processing – abattoirs and dairy processing points are very interesting. Australia is one of only three countries in the world that produces more milk than it consumes. A lot of that milk is then transformed into baby formula, and shipped overseas. It’s one of those products with a well-established global supply chain that’s virtually immune from disruption – even COVID-19. You can probably do without the latest iPhone and postpone that decision, but if you have a baby coming, you can’t postpone your demand for milk powder. Similarly, if you need access to protein, that typically needs to be slaughtered in Australia, packaged and then sent overseas. So, demand for those non-primary agricultural assets is definitely of interest.
Pharmaceutical manufacturing – before COVID-19, Australia was quite happy buying pharmaceuticals and medical goods from overseas. But what we saw in the early phases of the crisis was everyone scrambling for these goods and countries like China, India, and Pakistan, which produce and export the greatest amount of pharmaceuticals and medical goods, keeping them in their own country. Australia, and I think a lot of other places, now realise we need to be able to produce the base level of medications required, such as insulin to treat diabetes. We can’t rely on overseas suppliers because if their supply chains are disrupted or redistributed, that can have huge impacts for the Australian population.
It’s when you cross-reference information sources such as annual reports, research papers and studies into human behavioural patterns, that opportunities emerge for investors willing to look at the alternatives to mainstream investments in the pursuit of outperformance.