Time to shine for alternative real estate: Goldman Sachs

Locally, alternative real estate makes up about $19 billion, little more than 10 per cent of the $168 billion listed market.

“The Australian listed real estate market is significantly under-represented in alternatives, when you look at alternatives in other markets. So there is massive opportunity in alternative real estate here,” Mr Sheldon told The Australian Financial Review.

While interest in the diverse sector had already been growing, the impact from the COVID-19 disruption over the past year has accelerated that. The traditional listed assets of office towers and shopping malls are facing headwinds as patterns of work and shopping undergo longer-term change, accelerated by the pandemic experience. Landlords of industrial property – warehouses, factories and logistics facilities – have fared better.

That uncertainty is reflected in the stocks of property platforms built around malls and office towers, which in some cases are trading at 20 per cent discounts to their asset values. By contrast, property trusts holding data centres, affordable housing estates and childcare are trading at hefty premiums.

“The reason for this is that a lot of this real estate [in alternatives] is essential services real estate,” Mr Sheldon said.

“What that means is that the underlying demand driver for this type of real estate is very strong, it is not going anywhere and people understand it.”

The news feed in the property sector in recent weeks alone reinforces the point. Listed fund manager Home Consortium, led by former investment banker David di Pilla, is pressing ahead with plans to float a property trust based around healthcare assets.

Centuria, which took a controlling stake in Heathley’s healthcare focused real estate platform two years ago, is ramping up investment into short-stay hospitals and fund manager Real Asset Management also has plans to list a healthcare vehicle.

Meanwhile, the activity of data centre operators such as Macquarie-owned AirTrunk, which opened its fifth facility last month, has been growing rapidly as demand for storage escalates.

Accommodation also scores highly as an investment target in the world of alternatives. In the past week alone, US build-to-rent operator Sentinel revealed aspirations for a $1 billion portfolio, while players such as Greystar, Oxford Properties and ASX-listed Mirvac already have big plans.

The sub-sector is broad, taking in budget pre-fab housing estates – known as manufactured housing estates (MHE) – aimed at retirees to specialist disability accommodation, another boutique asset class that is also growing.

“MHE is one of the best-performing sectors and has been for quite some time in the US. It’s becoming that way here as it has institutionalised,” Mr Sheldon said.

“The MHE model combines themes of an ageing population and affordability. That trend is definitely going to continue. It is still a very fragmented market. There will be further consolidation in that sector.”

Despite the evident shortfall of alternatives in the local listed market, Mr Sheldon does not expect “a massive rush” of listings in the near term. Rather the emerging sector will evolve gradually as there is simply not enough investable product yet, although there is clearly demand.