The global economy is set to be pretty rocky in 2023 and Asia Pacific is not going to escape, even though we look relatively strong compared with other regions; rising interest rates and inflation will impact all real estate investors. 

We believe that the host of alternative real estate sectors which have emerged in recent years can add diversity and resilience to property portfolios. Emerging sectors such as cold storage, life sciences, self-storage, last mile logistics, data centres, education, healthcare and flexible offices all tap into global megatrends and the needs of the digital economy.  

Of course these trends also drive the core real estate sectors: office, retail, residential industrial & logistics and hospitality. The line between core and alternative is fluid; logistics was once considered alternative and multifamily residential – the biggest real estate sector worldwide – is still pretty niche in Asia Pacific outside Japan.  

Similarly, self-storage has been established in the US for quite some time, but remains a specialised business in Asia. The division between core and alternative sectors is somewhat arbitrary. 

A particular characteristic of alternative real estate sectors is the larger operating component and the requirement for active management. Specialist skills are needed for life sciences real estate or data centres. Of course this has always been the case with the hospitality sector, where branded specialist management companies take on that role for asset owners. However, more and more real estate investors are finding value in getting more involved with the operating side of their investments.  

This is also becoming true in core sectors such as offices, where landlords cannot afford to treat their assets as if they were fixed-income investments. Tenants – and this means the people using the office, not just the company signing the lease –  are far more demanding today and require active management.  

Something different today is that real estate investors are prepared to get more involved in the operational side of alternative sectors, whether via a partnership with an operator or creating a new business line.  

What makes alternative real estate sectors in Asia Pacific so attractive is the chance to establish a dominant position with assets and with an operating platform to add value. Many alternative sectors are underdeveloped here compared with the US, which tends to lead in this regard.   

So, which alternative real estate sectors offer the best opportunities in Asia Pacific? There are opportunities in all sectors, including core sectors, but those linked to the region’s demographics and urbanisation are particularly compelling because these underlying forces are so strong in this region.  

The biggest demographic trend in developed Asia Pacific nations is the ageing population. Japan is the most famous example but Greater China and Korea are also ageing fast. This will drive long-term opportunities in both healthcare and senior living. Both are difficult sectors to be involved in, due to regulation, but the demand is huge and growing.  

In emerging Asian economies, the most important demographic trend is the growth of the middle classes in growing cities. A billion people in Asia are set to join the middle classes over the next decade and that means one billion people seeking better homes, better food, better health and better education.  

Education is likely to be a prime beneficiary, with substantial demand forecast for international schools and higher education. This will be an opportunity for developed markets with a more established education infrastructure too.  

Health in the very broadest sense is the other middle class priority, with demand for healthcare facilities and for the products of the life sciences industry, which is becoming an important niche in markets such as Singapore, India and China. Demand for better food will support the growth of cold storage in developing Asia.  

Finally, the growth of the digital or new economy in Asia is underpinning demand for sectors as diverse and data centres and last mile logistics facilities. After the “covid spurt” in demand we will see some slowing, but the direction of travel is not in doubt.  

All of these sectors require thoughtful investment, good advice and the recruitment of specialists in one way or another. Many of these sectors are small today. However, this is the way the increasingly sophisticated world of real estate is going; specialisation and a bigger operating element will come to characterise core assets too. If you are looking for diversity, resilience and long-term growth, alternative real estate sectors could be the answer and 2023 a good time to start. 

Further reading:
Savills Hong Kong research

Contact Us:
Simon Smith