After five years of record yields, returns for commercial real estate are expected to fall by almost a fifth by 2022. For investors chasing yield growth, 2018 is the year to start looking at emerging property sectors to diversify and seek higher profitability, experts believe.
CBRE believes yields, which are at “cyclical lows”, will not bounce back up until 2019, according to its 2018 Real Estate Market Outlook Australia report.
In this stage of the market cycle, it is expected investors will adopt a long-term hold strategy, or to explore other asset classes.
“While core assets will remain in demand, purchasers are likely to continue to search for higher returns and therefore further explore core-plus markets as well as alternative asset classes,” Cushman and Wakefield’s Australia Investment Marketbeat Q4 2017 report wrote.
Here’s an overview of three emerging property sectors that could give offices and hotels a run for their money down the track.
If you think data lives in a spaceless cloud, you’ll be surprised to know how much the bricks and mortar storing your social media, backup files and emails is worth.
A slew of deals and developments in recent months, including US data centre giant Equinix’s $1 billion purchase of Australian data centre business Metronode, have highlighted the growing heat in this market.
The Australian data centre services market, mostly centralised in Sydney and Melbourne, will grow by 13.2 per cent a year to $2.51 billion by 2021, consultancy firm Frost & Sullivan predicts.
It is seen to be a long-term investment with occupant turnover being very low, as switching data centres can be expensive and risky on the technological side of things.
Yields can range from 6 to 8 per cent, JLL’s lead data centre director Jordan Berryman said. This is compared with a 4.95-per-cent rental return for a Sydney CBD A-grade office, according to Savills.
Like in all real estate dealings, location is a key factor. The closer the data is to critical network infrastructure, the faster users can access said data. For example, Alexandria, being the landing point of the Southern Cross Cable network, makes it a data centre hot spot.
“A lot of our property sites are (facing competition from) industrial or residential conversions and gentrification… for a limited source of land,” Mr Berryman said.
Automated industrial and logistics assets
With the explosion of online shopping, the industrial sector saw record growth in 2017. But as e-commerce has only just begun its rise, the industry is ripe for further growth and disruption.
Yet Australian occupiers are still sitting on the sidelines when it comes to implementing automation in industrial properties, the CBRE report noted. Concerns related to the return on investment in such technology are rampant, as the financial payback hasn’t yet been tested in the Australian market.
Colliers International’s associate director for industrial research Sass J-Baleh said, “every logistics company is thinking about (automation)”.
“They’re really thinking about the design of their facility they’re offering just to differentiate themselves a bit more in the market, because you’ve got all these developments coming online,” she said.
While it is difficult to assess the yield or the premium of fully automated logistics centres, as there are simply not enough of them around yet, Ms J-Baleh said industrial centres built to cater for future automation solutions, such as higher building heights for the machinery to reach higher, are able to secure earlier pre-commitments.
One of the few examples of fully automated centres in Australia is Tolls’ $160 million distribution centre, which opened in western Sydney in early February.
Interest in healthcare as a real estate investment has increased in the past two years, JLL’s manager of healthcare and seniors living Simon Quinn said.
“The strong demand drivers are the ageing population and the nature of healthcare being non-discretionary spending, typically with private hospitals, GP medical centres and day surgeries as well,” he said.
He added that medical properties have defensive income profiles, long leases and quality tenants.
Yields for sub-prime assets will remain between the 6 to 7.5 per cent, with prime being in the 5 to 6.5 per cent range, a 2017 JLL report on healthcare found.
Mr Quinn said yields for the sector’s trophy assets – namely private hospitals and pathology labs above $20 million – have compressed in the past few years.
“For the larger investors, it’s really about getting scale, their big focus is probably private hospitals and pathology labs,” he said.
“A few years ago we were talking 8 per cent-plus, and now we’re talking sub-6 per cent for prime healthcare assets with scale.”