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Alternative assets grow in popularity despite commercial slowdown

Higher interest rates and geopolitical uncertainty are slowing down commercial property transactions, however, alternative assets are continuing to attract attention.

Ray White Commercial, Head of Research, Vanessa Rader said assets such as childcare, medical, and service stations continue to increase their share of investment activity in the sub-$50 million range.

“These assets have been growing in popularity over the past 10 years, and their attractiveness has not wavered during this time of elevated finance cost,” Ms Rader said.

“This year, these assets represented 10.3 per cent of all of the sub-$50 million commercial investment, compared to 3.5 per cent in 2020. 

“Investment yields for these assets continue to trade at competitive rates given their expected growing income stream during a time where the built form is king given replacement costs.”

Ms Rader said within the alternatives segment, the largest growth area has been in medical assets

“Our increased needs across all age groups, coupled with robust population improvements, is growing requirements for these assets,” she said.

“Similarly, childcare continues to increase, buoyed by government subsidies, notably in key growth nodes across the country. 

Despite the threat of electric vehicles, Ms Rader said service stations remain in demand, particularly those with future upside potential. 

She said challenges across the housing market had also seen a resurgence in enquiry around “block of unit” investments, capitalising on rising rents, low vacancies, and continued capital appreciation, which has now extended into boarding houses and the build-to-rent space.

According to Ms Rader, the variety of alternative investments are vast, with assets like car parking and storage offering inexpensive opportunities to diversify many investors portfolios. 

Hotel and leisure assets have also grown their share of volume, with caravan parks a land banking opportunity by opportunistic investors,” she said.

“The chase to secure these assets has been faster and more active than traditional commercial investment options, which raises the question of: what’s next? 

“Perhaps the humble car wash might be the next one, with limited investment needed into the built form, and as vehicle sales continue to grow inline with our population gains; these could offer both a stable income with strong future development upside.”

Ms Rader said across the major asset classes, industrial property continued to attract the most attention, with its share of transactions sitting at 38.2 per cent in 2023.

However, demand for office assets continues to decline she said.

“During 2020 it accounted for 21.3 per cent of all sales, however, the greatest fall has been felt in the last year to 17.8 per cent in 2023,” she said.

“Sentiment shift across the office asset class has been strong given the rapid rise in vacancies due to the changing nature of workplaces in a post-COVID environment.”

Ms Rader said the development site space has also seen some consolidation due to the rapid escalation in construction costs and labour shortages. 

“While only representing a small portion of the market, we continue to see these assets becoming more difficult to “stack up” despite pressures to develop various asset classes given the recent gains in population across the country,” she said.

“This year, development site sales represented 4.2 per cent. after recording 7.9 per cent in 2020.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.