Alternative Assets Bear Fruit as Capital-Hungry Revolution Begins

“Every single real estate decision should be viewed through an ESG lens.” That was the sage advice from JLL Australasia head of research Andrew Ballantyne as he opened The Urban Developer Commercial Real Estate Summit in Sydney. It would be “very naive” not to do so, he suggested. “You have to think of ESG longer term,” he added. “It’s not a linear journey. And there will be disruption in terms of sentiment towards it, coming out of the US in particular.” But just five hours later that disruption had moved somewhat closer—sitting on a panel right in front of the room full of property development and investment leaders. “Net zero is essentially national self-harm in this country in my opinion,” Kennards Self Storage chief executive Sam Kennard said. “It’s not going to change the climate.” On the panel discussing alternative real estate investments, Craig Scroggie—the boss of national data centre provider NextDC—weighed in. “I’m going to the NSW Parliament after this to talk about the future of energy strategy and I’m going to use that self-harm description … fantastic line.” ▲ NextDC boss Craig Scroggie, Centuria Capital joint chief executive Jason Huljich, and Kennards Self Storage’s Sam Kennard during the summit. Meanwhile—sitting between them—if he had the urge to fling a few over-ripe tomatoes, Centuria Capital joint chief executive Jason Huljich was well-equipped. With a plump and juicy arsenal to draw upon from the company’s high-tech renewables-powered greenhouse investments, he was clearly showing considerable self-restraint. The Sydney-based fund manager began its diversification from the office sector into alternative real estate with healthcare assets in 2017, deeming it an “engine room for growth”. After its takeover of Perth-based Primewest, it moved to strategically scale-up its exposure to agriculture assets, targeting state-of-the-art large-scale glasshouses focused on sustainabe farming “We set up a new fund and we bought one of the biggest glasshouses in Australia, just outside Melbourne,” Huljich said. “It’s about 33ha—or about 15 MCGs—under glass and it’s just for growing tomatoes. Since then, we’ve bought another five and we’ve got about 60 per cent of the market now. “We just take the property piece and the facilities are tenanted on 20-year triple net leases to really experienced operators.” ▲ South Australia’s Sundrop Farms features a concentrated solar power system. Its glasshouses supply major supermarket chains including Coles, Woolworths, Aldi and Harris Farms, all of which have sustainability and emissions reduction strategies. Sundrop Farms, a 20ha greenhouse facility at Port Augusta in South Australia, is Centuria's cutting-edge, renewables-driven horticultural showpiece, producing 17,000 tonnes of tomatoes a year. It features a concentrated solar-thermal power system with 24,000 mirrors pointed at the top of a 127m boiler tower that generates 30,000 megawatts of heating and 45,700kWh of electricity used to keep the greenhouses at the right temperature and facilitate the desalination of seawater piped from Spencer Gulf for crop irrigation. “They’re not your old traditional glasshouse,” Huljich said. “They’re very expensive to build but they’re very profitable. Per square metre in a field you might grow 7kg of tomatoes a year. But per square metre in one of these glasshouses you get 80kg. “It’s massive and there’s also a lot less waste. So there’s a lot of benefits.” Underpinned by future forecasts for global food demand, Centuria is looking to increase its investment in the alternative asset class, not only by expanding existing glasshouses but also building new facilities—including high-tech, automated lettuce greenhouses. “There’s some pretty good tailwinds driving demand, mainly from the growing middle class in Asia,” Huljich said. “They want more variety of food, more quality and safe food. Australia is really well placed to supply that. So what isn’t taken onshore will be exported.” Likewise, investment in Australia’s self-storage actor is on the rise with population growth and housing pressures key drivers of demand. “Our industry is actually growing faster than the population,” Kennard said. “There’s a lot of new supply coming in and development happening.” Kernnards Self-Storage itself is a $3.5-billion empire with 112 locations and counting. “We typically do three to five [new locations] a year,” Kennard said. ▲ JLL Australasia head of research Andrew Ballantyne: Data centres are another alternative asset class on the rise for very good reasons. Its competitive landscape includes two major REITS—National Storage and Abacus Storage King—that have been actively growing, mostly through the acquisition of going-concern facilities. “And some international funds are now looking at the sector,” Kennard said. According to JLL’s Ballantyne, there is a strong appetite for real estate alternatives. He cited co-living and the undersupplied purpose-built student accommodation sector among the asset classes with “significant growth potential” and—given the accelerating technological advances, particular in artificial intelligence—data centres. “The requirements [for data centres] are only going to grow exponentially,” he told the summit in his keynote presentation. But it seems even that—by NextDC Craig Scroggie’s reckoning—could be an understatement. “This will be the single greatest investment cycle in history,” Scroggie said. “In the next five years, we’ll see more than a trillion dollars invested in data centres. “We’re about to enter the fourth industrial revolution or the fourth era of computing, which is AI driven. “It’s already happening right now…just in the last 18 months we’ve seen more advancements in AI technology than we’ve seen in the last decade and that rate of change will continue.” NextDC—the ASX's largest listed data centre developer and operator—last month launched a $750-million capital raise to fund its expansion into Asia “We’re a capital-hungry business that’s been growing at 20 per cent a year,” Scroggie said. “So, are there opportunities for people to invest in the sector? Absolutely. “But the idea that you can just wake up and say ‘hey, we’ve got a bunch of industrial assets and we’re going to try and sell them as data centres’—that might take a little bit more thought.” ▲ NextDC Craig Scroggie: Data centres will be the single greatest investment cycle in history. As the scales of what he calls “hotels for computers” have got larger, with the increasing reliance on digital infrastructure, so too has the list of variables for site selection—no bushfire zones, no flight paths, no floodplains, no earthquake zones, and adequate power with multiple-zone substations. NextDC is also classified as a system of national significance by the Australian Government, which allows it to decide the type of investors in the business, the percentage of ownership in the company, where its equity comes from and “a bunch of other things that lend themselves to national security related matters”. Asked from the summit floor to comment on US-based tech giants Microsoft, Amazon and Google investing in nuclear power to help meet emissions reduction goals and growing energy needs, Scroggie said: “The sun doesn’t shine all the time. The wind doesn’t blow all the time. “We need energy 24/7—all the renewables in the world will not provide that. “Australia is the only country in the G20 with a ban on nuclear energy, so until we actually repeal the legislation we can’t even consider that...so coal and gas have to continue.” And as far as ESG strategies go, he added: “The stark reality is the majority of energy for the world is still coal and gas.” “Australia still digs up coal and exports gas to China, Japan, and they burn it. We just feel better about it, because we’re not burning it. “And in the next 12 months China and India will commission more coal-fired power stations than will get shutdown worldwide in the next 12 months. “The energy challenge is a very, very significant one, and we could have a whole conference on that.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

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