Same, same but different: Why it pays to use trusted valuation tools to manage alternative real estate investments

Has the alternative investments division become your organisation’s hottest place to work, of late? If you answered in the affirmative, you’re far from alone.

Courtesy of our bird’s eye view of the market*, investors are increasingly turning to new theatres of commercial property investment which are supported by demographic tailwinds and updated client mandates. Enter the age of commercial real estate “alts”.

The alt asset glow-up

For decades, Australia’s professional CRE investors have selectively deployed capital into alternative commercial property — Australian Unity was an early mover in healthcare, as was Lendlease in Retirement Living. However mainstream popularity has increased over the past 12 months as tight market conditions have made it tough for property groups to gain a competitive advantage in the traditional office, retail, and industrial spheres; some of which face new structural challenges. Cue a rush to explore the alternatives: data centres; student accommodation; retirement villages; life sciences precincts; health care assets; and build-to-rent (BTR) apartment complexes.

BTR has become especially hot property of late, as soaring residential property prices have pushed home ownership further out of reach for thousands of Australians of all ages, making long-term renting their only option. Leasing a well-maintained and managed apartment in a sought-after, inner-city location, from a professional landlord, can be a considerably more attractive proposition than taking one’s chances in the less predictable, mum and dad investors at the other end of the market.

The upshot is big name players beginning to pile in — Mirvac with its LIV branded projects in Sydney’s Olympic Park, Melbourne’s Queen Victoria Market precinct and Brisbane’s amenity rich Newstead, Meriton with its sprawling complexes in Sydney’s Mascot and Waterloo, and Lendlease with its recently announced development at the Brisbane Showgrounds, in partnership with QuadReal Property Group.

According to research completed by JLL, by the end of 2022, there were more than 20,000 BTR apartments in the pipeline to be completed in Australia over the coming three years — nearly five times the current built stock, around a 50 per cent increase in pipeline activity from a year earlier.

The question of value

But, while property firms and funds are merrily jumping aboard the alt investments bandwagon, setting up specialist teams and scouring the market for opportunities, working out what these assets are worth remains something of a challenge.

That’s because, unlike shopping centres, office towers and industrial facilities, they’re not being bought and sold on the daily. The alt assets market is disparate, fragmented and continuing to emerge.

In some instances, literally. In the BTR sphere, for example, many of the assets in question are still under construction. In five or 10 years’ time, they may be changing hands frequently but, until that time, it’s tricky to conduct a meaningful market analysis and infer investment metrics of substance.

Other alt assets, including many aged care complexes, service stations, childcare facilities and others had their genesis within entities that weren’t property companies per se, although subsequent stock market listing may have seen them valued as such. Investors on the acquisition trail have therefore relied on intuition, and skilled investor relations professionals to reposition the investable asset for an investor audience more familiar with capitalisation rates, income yields and internal rates of return.

Agreed valuation methodologies and modelling remain a work in progress, making it challenging for buyers and sellers alike to identify opportunities and undertake financial due diligence.

New assets, old tools

How then to proceed, in the absence of these data points? Or to gauge the attractiveness of a potential alt asset investment, versus that of a conventional institutional asset?

Unfortunately, we’re seeing many firms and funds taking a retrograde step — reverting to the use of in-house Excel models to assess alt asset acquisition targets and manage the alt assets in their portfolios.

Using last century’s technology, these homegrown investment models are very often not critiqued, refined or tested for accuracy and integrity.

They don’t usually have the facility to assess risk across multiple scenarios, or to factor in details such as lease terms and covenants, which can have a material impact on saleability, value and returns.

The power of professionally developed software

Specialist investment management platforms and solutions have comprehensive capabilities for assessing complex assets. In many organisations, they’re already in use over in the industrial, commercial, and retail property divisions.

Given the investable proposition of many alt assets are fundamentally no different from conventional assets, their owners and investors are ultimately seeking yield and capital growth. It makes sound sense to assess them in the same way. That is, using the same tried and true technology that’s allowing decision makers to gain a data driven edge in other sub-sectors of the property market.

As your organisation ramps up its activity in this sexy, new space, having the right tools is an investment in future prosperity that’s likely to deliver excellent returns.

Scott Willson is the CEO at Forbury