Real estate (operational and core)
The case for alternative real estate: Broadening the horizon
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Daniel Hargraves
Fund Manager
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Published 28 August 2023
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The last 18 months has been challenging for traditional real estate investment.

The combined effects of spiking inflation and the urgent response from central banks has ended the era of cheap debt. Rapid rises in interest rates and increasing finance costs for borrowers have weighed on earnings and investment returns. This has been felt acutely in more traditional (core) real estate investments where revenue is built around structured rental flows, leaving little room to pass through higher costs.

The increase in cash rates has pushed government bond yields higher creating investor concern around a corresponding expansion in capitalisation rates for core real estate and a potential decline in asset values. After experiencing a jolting decline in value in 2022 as investors de-risked their positions, Australian listed real estate securities have stabilised in 2023, although the question around capitalisation rates continues to dominate the sector.

Overshadowing this has been talk of a global recession, stemming from central bankers committing to a strategy of rate hikes to curb inflation, sending the asset class into a halt.

Fuelled by the pause in capital invested in core real estate and supported by compelling demographic and structural changes supporting improving demand drivers, ‘alternative’ (operational) real estate is set to broaden its investment footprint.

The market in Australia is estimated to be valued at ~$235 billion, but what is alternative real estate and what are the key factors driving increasing investor demand?1

What is (or what is not) alternative real estate?

Alternative real estate has been coined as a convenient term to unify a range of non-traditional forms of real estate investments.

Considered against core real estate investments such as office buildings, retail shopping complexes, logistics and warehousing, and even residential property, alternative real estate is broadly and loosely defined by what it is not. It refers to investment in real estate sitting outside of these traditional boundaries.

Operational intensity a key distinction

Also referred to as operational assets, the return from alternative real estate is linked directly and deliberately to the revenue or income generated by operating the asset.2 As a result of this alignment, when investing in alternative real estate you are, in a sense, both the tenant and the landlord.

This definition emphasises the operational nature of the assets, in particular the ability to deliver key performance metrics specific to their use - including income and occupancy – through active management of the space, specialist expertise, as well as taking advantage of the unique attributes of the asset, for example its design or build quality, location, or distinct function.

Alternative real estate can be divided into three (very) broad and often overlapping categories – social infrastructure, living and infra-lite - based on key demographic determinants, the function the asset fulfils and demand drivers for the end-user.3

Social infrastructure: these assets support the well-being and quality of life of communities. Backed by public expectations for improved access and recent government policy reforms, this sector includes private hospitals, medical centres, aged care, childcare, and specialist disability services.

Healthcare dominates in terms of size and institutional investment. Nonetheless, there is a myriad of asset types in this category from hospitality, hotels and pubs, marinas, and service stations to educational, art and cultural facilities.

Living: driven by changing housing requirements and the broad undersupply of new housing, the ‘living’ category includes build-to-rent, student accommodation, retirement facilities, and lifestyle communities.

Infra-lite: this category includes assets that lie close to the boundary of infrastructure and traditional property assets such as data centres, self-storage, life sciences (laboratories, research facilities) and renewables (solar and wind farms).4 This category is called ‘light’ due to low asset value concentration (there are many rather than few assets), a lower level of public usage and limited government regulation.

What is driving investor interest in alternative real estate?

The value of an asset is ultimately a function of its earnings potential and alternative real estate can offer investors several key benefits including:

  • regular income - income is often better protected from vacancy risks and inflationary pressure as prices can be reset and higher costs passed through to end users of the product or services provided
  • diversification – from both traditional real estate and public market volatility (as they are generally unlisted investments)
  • capital growth – the expertise of the operator can generate earnings growth which offsets the expansion in capitalisation rates, underpinning growth in the value of the asset.

Alternative assets are generally more defensive in nature. They have a greater ability to maintain and grow earnings against the backdrop of high inflation and a slowing economy.

Additionally, several alternative real estate sub-sectors are still maturing as more sophisticated, corporatised operators with deeper capital relationships invest in the sector.

This brings greater access to key drivers of growth: economies of scale, extraction of operational efficiencies, and the integration of technological improvement to capture greater earnings and upside value. Notable examples of the benefits of this transition can be seen in the growth in childcare, retirement, self-storage, and land lease communities in recent years.

Alternative real estate can never be entirely removed from macro challenges. However, structural changes in societal norms, work patterns, shopping and consumer spending habits, and technological change are challenging core real estate sectors, increasingly focusing investor interest on alternative real estate options.

Growth potential in the alternate universe

The total value of Australia’s alternative real estate sector is estimated at ~$235 billion, roughly equal to the size of Australia’s retail and logistics sectors combined.5 Despite its scale, alternative real estate is heavily under-represented in both Australia’s listed and unlisted property sectors.

As with traditional forms of real estate, alternative real estate is accessed via direct investment or through pooled investment vehicles with unlisted private fund structures and select A-REITs the predominant investment vehicles in Australia.

The ownership of alternative real estate assets by A-REITs represents ~10% of the total A-REIT market capitalisation. In contrast, the market capitalisation of alternative real estate assets in the US (~US$710 million) accounts for more than half of the ~US$1.2 billion listed real estate universe.6 From US experience, it is evident there is significant scope in Australia for increased allocation to alternative real estate assets.

The increased allocation by institutional investors to private markets and the ability to add value through operational efficiency creates significant opportunity for private equity investors also, evidenced by the acquisition of Healthscope by Brookfield and intense bidding for Ramsay Healthcare by KKR.

Ceteris paribus | All other things being equal

Financial market risks in 2023 have multiplied, continuing to shock and rock investment markets demanding a dynamic and defensive approach to investing.

Even as macro conditions continue to generate uncertainty for investors in core real estate, alternative real estate is set to expand its reach as demand for essential and discretionary services dictates.

As defensive alternative real estate sectors mature, extracting greater efficiencies through economies of scale, technological innovation, and access to deep capital, astute investors are increasingly set to benefit from higher earnings potential.


1. Alternative Investments Outlook 2023, JLL Research Australia 2022,

2. Ibid

3. Ibid

4. Infrastructure assets are physical assets providing an essential service to society. They are heterogenous, capital intensive with high barriers to entry, often holding a monopoly or duopoly position. Examples of infrastructure assets include airports, toll roads, seaports, and utility networks.

5. Alternative Investments Outlook 2023, JLL Research Australia 2022,

6. Investment Strategy Update #120 | Alternative real estate: A new growth option in real assets, Macquarie, 10 October 2022,

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