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US, Hong Kong, Beijing Among Top Markets Targeted by 97% of Investors That Plan More Real Estate Investment

Data Centers, Healthcare Facilities Favored as Executives Show Interest in Real Estate Technology
October 11, 2018

Hong Kong is among the top markets cited by institutional investors who plan to put funds into commercial real estate in the next 18 months.

The United States, Hong Kong and financial centers in China such as Beijing are the top markets cited by the 97 percent of institutional investors who say in a new survey that they plan to boost capital commitments to commercial real estate in the next 18 months.

Global investors said they expect to increase funding of commercial real estate, favoring nontraditional properties like data centers and healthcare facilities, and real estate firms that use more sophisticated technology to analyze property usage, according to advisory firm Deloitte’s newly released 2019 Commercial Real Estate Outlook. The results track with CoStar News interviews with commercial real estate executives with expertise in investment management and technology.

The firm surveyed C-suite executives from 500 real estate institutional investors in 10 countries across the Americas, Europe and Asia Pacific. Investors include private equity firms, hedge funds, mutual funds, asset managers for banks and insurers, pension funds and real estate investment trusts.

It found that 13 percent of respondents from the United States and Germany plan to increase investments, followed by 12 percent from Canada and 9 percent from China and Hong Kong. The top preferences are for mixed-use properties at 14 percent and nontraditional properties with 13 percent. And of nontraditional real estate, 67 percent preferred data centers, 55 percent liked healthcare real estate, 49 percent went with mobile cellphone towers and 29 percent opted for single-family housing.

"We are seeing an over-allocation of capital to nontraditional assets by investors," said Jim Berry, U.S. real estate leader at Deloitte, whose division carried out the survey. "Data and healthcare lead in the survey of nontraditional assets that are favored but also includes others non-traditional asset types including cell towers and single family homes. Investors are looking at diversification of dollars and investing in changing platforms / emerging opportunities."

He noted that investors seek stability. "These are considered safer harbors while providing for growth opportunities and expansion."

The results of the survey line up with the priorities and predictions of commercial real estate executives interviewed by CoStar News about general investments in the industry over the next 18 months.

David Bitner, head of Americas capital markets research at commercial real estate services firm Cushman & Wakefield, said the United States "continues to be viewed as the most stable, liquid market globally as well as offering the best opportunities for capital appreciation. Going forward, we expect to see Japanese, Middle Eastern and European capital more acquisitive in the U.S. Hong Kong capital is still in play and Singapore has and should continue to be highly active."

Jim Koman, managing principal and founder at St. Louis-based private equity real estate firm ElmTree Funds, said investors are "likely seeking nontraditional commercial real estate investments to garner additional yield and/or higher returns in the current market. More traditional core real estate assets have experienced significant price appreciation over the last several years so investors are likely shifting their focus slightly to other sectors of the real estate market that may offer value in the current stage of the cycle."

He said that he expects healthcare real estate, medical offices, age-restricted housing and senior housing, to be more in demand from an aging U.S. population. Data centers will "expand dramatically" to accommodate cloud computing and the so-called Internet of Things, he said.

Daniel Mahoney, senior vice president of research and strategy at LaSalle Investment Management, agrees that interest in nontraditional, or niche, property types is growing. These include self-storage, seniors housing, parking, medical office, hospitals, data centers and student housing. But, he warns, nontraditional assets comprise a relatively newer class of property that doesn't have as much performance data as historically invested properties like office and apartment buildings.

Investors should also consider that niche assets require a more specialized underwriting approach than traditional properties, Koman noted.

"Data centers and healthcare assets have unique underwriting challenges that some investors who have historically only invested in office and industrial properties may not be able to effectively underwrite," he said. "Healthcare, for example, typically has a higher basis than industrial and office properties so investors need to ensure they have effectively underwritten the residual value of the property if the asset has to be re-leased in a downside scenario."

Mahoney adds that, "One of the key opportunities for growth we see in the niche property sectors is that these properties sit on one of the last frontiers of real estate transparency. Access to information on market rents, inventory and pricing varies wildly from one alternative to the next – some sectors have excellent market data while others have very little."

While seniors housing has transparency equal to the major property types thanks to specialized data providers like the National Investment Center for Seniors Housing & Care, Mahoney explained, "Other niches like parking and data centers have no specialized data providers, which means that market data is limited."

Diana Bell, New York City Market Reporter  CoStar Group   
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