Five ways big investors are betting on property
Robin Khuda, the chief executive of data centre giant AirTrunk, is no stranger to rapid growth; he started the business in 2015 and it is now said to be worth as much as $10 billion. But even he can’t quite believe how the artificial intelligence boom is changing his business.
A few years ago, a big deal could see AirTrunk sign up a client who needed five megawatts of capacity; each megawatt is worth between $15 million and $20 million.
But now, the sheer level of data centre capacity required for AI applications means deals in the hundreds of megawatts are common.
Data centres
“The level of growth we are seeing right now, we haven’t seen in 10 years. It’s remarkable,” Khuda told The Australian Financial Review Property Summit in Sydney on Monday.
While offices might be on the nose, and while investors are circumspect about retail property, data centres are one of the hottest areas for big property investors such as Blackstone, Goodman Group and Brookfield.
Indeed, Khuda’s company, which is backed by Macquarie Asset Management, was at the heart of one of the sneaky-big deals of the year, when more than 40 banks flocked to back AirTrunk’s $4.6 billion debt refinancing.
Debt refinancing
The deal underscores a second big way institutions are betting on property – via debt.
Blackstone’s local head of real estate, Chris Tynan, said that while this is a tough time for equity investors in property, who wanted to be really sure their cash flows were holding up in an environment of falling valuations, debt investors were in the midst of a golden period.
With banks “paring back the asset classes they want to invest in” to commercial property in general and specific parts of the sector such as office property, the capital gap is being filled by both equity and non-bank lenders. Blackstone is able to play both sides of the street, with attractive returns on the debt side.
“We are getting low double-digit returns for the top half of the capital stack,” Tynan said.
Kylie Rampa, the chief executive of Queensland government-backed investment giant QIC, agrees with Tynan; her firm has just launched a new debt platform to take advantage of the shifts in markets caused by higher rates and the change in the banks’ appetite for some sectors.
“I think in real estate there are going to be great opportunities over the next couple of years, until the banks step back in,” she said.
Agriculture
Another property bet QIC is making is in agriculture. Rampa explained that the firm likes to play big themes, and agribusiness ticks several boxes: sustainability, growing problems of food security and a rising trend towards land security.
The other attraction is the triple-banger returns on offer – or stacked returns, as they’re known more politely in the property sector.
First, there is land value growth of about 5 per cent. Second, there’s a 5 per cent operating yield from farming. And finally, there’s the growing potential to earn income from carbon credits, the market for which Rampa expects will boom in coming years.
“We just think it’s a really compelling thematic,” she said.
Student accommodation
For Blackstone, student accommodation is another big bet; the group has signed a $500 million deal to buy a business called Student One, which has towers in Brisbane’s Wharf Street, Adelaide Street and Elizabeth Street, with about 2300 beds all up.
This is part of a global bet by Blackstone. Foreign student numbers are surging in the wake of the pandemic, while supply is muted. Tynan said Australia’s student-to-bed ratio was modest compared with Britain and the US, and local supply had further been diminished by the fact that students were finding it hard to tap a stock-starved general rental market.
“It’s certainly something that we think has longevity and definitely has an undersupply of purpose-built student accommodation,” Tynan said, adding that Blackstone will be hunting for other opportunities in the sector.
Industrial property
The final hot area is a more obvious one: industrial property. Sean McMahon, chief investment officer at Charter Hall, said demand was outstripping supply by about 1.5 times, with the current wave of immigration likely to add another big boost to demand.
The push into so-called alternative parts of the real estate sector mirrors the broader shift into alternatives across global financial markets. At its heart is what Tynan poetically described as the hunt for “the real estate expressions of the changing ways we work, live and play”.
But as AirTrunk’s Khuda says, investors and lenders are being selective. With the interest rate outlook still uncertain, investors are focused on the biggest and best players with the strongest and most privileged assets.
