Although there may be increasing volatility across Australian and global markets in 2018, We have confidence in the favourable, long term structural trends in private markets, particularly in areas such as education, retirement, healthcare, food and water, and technology. We call these sectors the ‘essentials’, and given the size of private markets there is no shortage of opportunities to invest in 2018.
The cycle of opportunities and valuations varies widely across the private markets that we invest in. We continue to see attractive deals in growth capital and late-stage venture capital, private real estate (particularly student accommodation and retirement living), and real assets (particularly agricultural growth capital investments with transition to higher value products and access to water).
Student accommodation fundamentals are compelling
Looking specifically at our Private Real Estate business, valuations in student accommodation are being driven by some compelling fundamentals in the sector:
... Education is Australia’s 3rd largest export industry (behind iron ore and coal); and international student numbers in Australia grew by 70,000 over the last 12 months, faster than the growth in the supply of beds.
Compared to more mature student accommodation markets Australia has significantly lower supply of purpose-built student accommodation at 6%, versus 12% in the US and 24% in the UK.
We currently have a growing portfolio of 5,000 plus beds across nine purpose-built student accommodation sites. In 2017 we opened our 800-bed student accommodation facility in South Brisbane. We’ve also increased our stake in Atira (the operator of these assets) to 50%, with the other half owned by Goldman Sachs. We expect Atira (and the Australian student accommodation market as a whole) to continue to grow in 2018.
In retirement living, the fundamentals are also strong, with the number of Australians over 65 estimated to increase from 3.8 million today to 4.2 million by 2020, requiring 31,000 new independent living units across Australia’s capital cities. The number of people in purpose built retirement living accommodation is increasing but still well below what has happened overseas – for example,
...in Australia only 5.7% of people aged over 65 live in retirement living accommodation, whereas in the United States that figure is more than double.
As our population continues to age and as the number of people in retirement living continues to increase, we expect to see significant increases in demand over the coming years.
Across the industry, existing retirement villages are generally broad acre villas on sprawling sites. As a result, developers had no choice but to build in outer suburbs. The average age of existing villages is 24 years old. Accommodation is dated, and facilities are limited. This doesn’t cater for the new ‘baby boomer’ generation, who want a quality product in desirable locations.
We are developing brand new vertical retirement living developments with modern facilities. We have been able to secure five sites in the last year after establishing our retirement living platform, Aura, with our joint venture partners, Tim Russell and Mark Taylor. We are on track to open the second stage of our Corinda village in mid-2018 (which includes state of the art facilities – pools, wine rooms, hair-salons, medical consulting rooms and much more).
Although there is increasing speculation about rising interest rates, we expect that should this occur, valuations will be under pressure for assets valued on a cap rate, such as core property and core infrastructure. In our business, we operate with comparatively conservative levels of debt across our business and we are active investors. We do not invest on the basis of holding assets and hoping that cap rates compress – what we do is actively invest capital (both financial and human capital) in order to build value, which in turn drives returns for our investors.
Historically the market hasn’t fully appreciated the importance of using capital to actively build value across private markets investments, and this is one of the drivers of our investment performance and where there continue to be opportunities in 2018 and beyond. For example, in our Private Real Estate team we actively manage all our projects from land acquisition to construction completion, and we have also invested in the operating businesses, Atira, in Student Accommodation, and Aura, in Retirement Living.
While investors in private markets traditionally have investment horizons that are longer than those in public markets, we believe that even private markets still do not place enough value on factors such as:
- World-class leadership and management teams;
- Looking past the biggest markets for leading businesses in niche markets;
- Best-in-class governance and risk management; and
- Supply / demand dynamics in sectors such as student accommodation, retirement living, value-added agriculture and other ‘essential’ sectors.
We see investments driven by compelling underlying fundamentals combined with active management, and a focus on people and governance as some of the key ways to invest successfully in private markets in 2018.
For further information on Blue Sky’s Private Real Estate opportunities, please visit our website
Alex is the CIO at Blue Sky, and sits on the investment committee in each of our investing businesses (Private Equity, Private Real Estate, Real Assets and Hedge Funds) He is also portfolio manager for the Alternatives Fund (ASX:BAF).
Great article Alex !
Thanks for sharing Alex. it does however seem that there is an oversupply of student accommodation, particularly in markets like Brisbane and Melbourne. This would explain why Blue Sky’s investments are operating nowhere near the occupancy and average nightly rates which were assumed in their valuations. This might in turn help explain why the student accommodation team within Blue Sky has experienced a lot of turnover of once key people.