Have you clocked the hype around data centres as a property investment opportunity? It would have been hard not to, given the column inches the trade media has devoted to the topic, of late. Over the past 12 months, I’ve noted a number of articles extolling their considerable upside.
And you know something’s seriously hot property when consulting giant McKinsey puts out a bulletin, as it did earlier this year.
“Data centres have attracted the interest of investors, often because of the steady, utility like cash flows and risk-adjusted yields”, the firm’s January 2023 Investing in the rising data centre economy report observes.
Finding an unconventional edge
But owners of air-conditioned bunkers with an uber-reliable electricity supply and extraordinary redundancy aren’t the only ones raking in the oversized returns. They’ve always been there for the taking, for investors with a sharp eye for unmet needs, the ability to nose out deals that don’t often present in the form of a standard request for proposal, and the patience and persistence to turn a bright idea into a tangible, income-generating real estate asset.
In my past life as a developer, for example, we focused on the creation of unique long-term, income-generating property that epitomised the alt asset concept. In the wake of the Christchurch earthquake, it became evident that New Zealand needed to establish a highly robust facility where blood products could be stored and manufactured come “hell or high-water”. Highly specific requirements meant a purpose-built premises was the only practicable option. Recognising that the resultant building would be well-nigh impossible to repurpose, the New Zealand Blood Service was willing to enter into a lease-based relationship that spanned several decades.
Breadth of opportunities
Similar opportunities can be found in the healthcare and education spheres. Hospitals, aged care facilities and providers in the burgeoning university accommodation sector have bespoke bricks and mortar requirements, as indeed do supermarket, service station, and funeral parlour chains.
In some instances, the alt asset being sought can be more “social infrastructure” than standard property asset, a la the New Zealand blood bank, while in others, it’s all about location, location, location.
Whatever the specialist needs may be, having them met generally entails partnering with developers and landlords with specialist industry knowledge or expertise that are in it for the long haul.
As a growing number of traditional investors are willing and eager to be – particularly given long term, assured returns from highly credible tenants are increasingly hard to come by – in the commercial and retail spheres.
Traditional segments in decline
Once considered safe as houses, both these segments are subject to dwindling demand, courtesy of the COVID-driven work from home boom and the relentless rise of online shopping, respectively.
With new supply continuing to outstrip demand, Australia’s national office vacancy rate is sitting at around 12.5 per cent. It’s a similar story in the retail sphere: the CBD vacancy rate is 13.9 per cent and empty premises are a feature of suburban shopping malls up and down the country.
Given the reluctance to return to the office that’s latterly been exhibited by Australia’s white-collar workforce and the fact that consumers are pulling in their belts in response to cost-of-living increases – and consequently shelling out less at the shops – commentators don’t expect these figures to improve significantly in the short term.
The race for value
Against that backdrop, alt assets are the new black and I’d expect to see competition for them hotting up significantly, as more players chase the premium returns and long-term surety they can deliver.
Peter Rose, director, Forbury