Beyond office, retail and industrial real estate there lies a plethora of alternative property sectors. Data centres, purpose-built student accommodation (PBSA) and care homes, in particular, have significant potential.
Supported by strong structural factors that can drive demand and offer returns, these sectors can offer unique benefits to purpose-focused investors. The living sectors also have the potential to make positive ESG contributions.
Given that they are less affected by business cycles, alternatives can be a good way to diversify. Phenomena such as the digitalisation of our business and personal lives, the ageing of the population, and growth in higher education continue whether the economy is up or down. While total commercial property investment in 2022 was down 18.5% year on year, investment in PBSA, care homes and data centres increased by 30.2%.
Annual Growth in Total Commercial Investment and PSBA, Care Homes and Data Centres
Source: Savills using RCA
Our projection across 13 global markets for PBSA, care homes, and data centres over the next decade shows a significant investment opportunity, amounting to 17 million care home beds, 18 million PBSA beds and 110,000 megawatts of data centre capacity. This translates to an additional space of more than 12 billion square feet required to satisfy this demand.
Source: Savills Research using CoStar, HESA, German Federal Statistical Office, Korean Council for Education (KCUE), UNESCO, Oxford Econmics, TeleGeography
Digitalisation drives data centre demand
“Data centres are on the verge of significant growth, driven by increasing demand for cloud computing, big data and the Internet of Things,” says Scott Newcombe, EMEA Head of Data Centres at Savills. New technologies, such as 5G and AI, are accelerating this trend.
Digital use around the world still varies enormously. At the top end of the scale, 55 countries enjoy internet adoption rates exceeding 90%. Meanwhile, the number of “unconnected” people in countries such as India and China is over 1.1 billion.
Individuals Using the Internet as Percent of Total Population
Source: Savills Research using World Bank
Technological innovations such as artificial intelligence (AI), machine learning (ML), and the internet of things (IoT), are expected to upend data generation and usage and, therefore, increase the need for data centres.
Most data centres have historically been owner-occupied, predominantly by a few specialised public REITs such as Equinix and Digital Realty. But new investment requirements tied to ESG credentials, for instance, mean that property investors are increasingly welcome.
Meeting sustainability criteria in power-hungry data centres can be challenging. The way forward is improving energy efficiency and using renewable or self-generated energy.
Higher education needs housing
In the decade preceding 2020, there was a 68% increase in the number of international students, mostly in developing nations. That growth is set to continue, driving demand in nations such as India and in countries popular with international students, such as the UK and Australia.
UNESCO forecasts that over the next decade, student numbers will double in Japan, South Korea, Australia, China and India. The student population in the 13 global markets analysed here is predicted to nearly double to more than 227 million by 2033.
Global Student Number Growth
Source: Savills Research using UNESCO
A limited supply of affordable accommodation and a higher number of smaller households are increasingly driving students to purpose-built accommodation post pandemic. They seek housing options that offer community living, amenities, safety, and access to transportation and entertainment. Consequently, demand for high-quality PBSA in major university cities has gone up.
“The structural undersupply of the student housing market in Australia looks set to continue for the medium term, given the relatively restricted pipeline of new projects underway,” says Paul Savitz, Director Operational Capital Markets, Savills Australia and New Zealand. He cites rising build costs and high debt finance costs as two reasons for the trickle.
Ageing populations seek new accommodation
Populations are ageing worldwide. The number of people aged over 80 in the 13 markets analysed will nearly double over the coming decade, from 94 million in 2023 to close to 160 million in 2033, according to Oxford Economics. Many of them will need special accommodation.
Aged population (>80) growth 2019 – 2033
Source: Savills Research using Oxford Economics
“Property investors who meet this demand will be fulfilling a real social need,” says Richard Valentine-Selsey, head of European Living Research at Savills. “There is a need for senior housing across a spectrum that runs from independent living to specialist nursing homes for end-of-life care.”
As lifestyles and priorities change, driven by technological advancements and demographic and social change, new real estate asset classes are emerging and proliferating. For property investors, this presents an opportunity to look beyond the traditional triptych of office, retail and industrial assets – to a group of asset classes that are growing rapidly, resistant to economic uncertainties and will benefit future generations.
