Alternatives Outlook 2024 Report

OUTLOOK FOR 2024

Reliable and growing income remains paramount for investors, especially in the current economic environment where CPI is anticipated to remain high, and return expectations are elevated. As a result, investors are anticipated to seek assets that offer the potential for market rental growth that can be realised at regular intervals. Assets and sectors that provide this are increasingly being labelled as having ‘mark-to-market’ advantage. Alternative sectors that offer this advantage within their operational model include BTR, PBSA, co living and self storage. Furthermore, the financial sustainability of lease terms are increasingly being scrutinised and priced accordingly upon the acquisition of leased alternatives. Although demographic tailwinds are strong, sectors such as healthcare, childcare and education businesses have not been immune to operational margin pressures. The ability to drive rental growth upon review based off operating expectations is likely to be a key differentiator in prime versus secondary pricing across several alternative sectors. ACCESS TO REAL INCOME GROWTH TO REMAIN A KEY FOCUS

MOMENTUM TO REBUILD ACROSS SEVERAL MATURE SECTORS Over the past few years, a significant amount of attention has been placed on newer, development-led sectors including BTR, PBSA, Co-Living and Data Centres. However, inquiry is rising for sectors that offer immediate access to operational stock and consequently, income. This includes larger mature sectors such as retirement living and childcare alongside niche offerings that sit outside the core realm including emergency services, pathology, court houses and education assets. This momentum is expected to be been driven by several factors. Firstly, although some relief is expected across the construction industry in 2024, development timeframes remain extended and feasibilities weak in many instances – a hindrance for new entrants in particular. Secondly, sectors such as living require substantial scale to achieve management efficiencies while sectors such as data centres require highly specialised and capital-intensive management. These two factors present hurdles for new entrants and mid size investment managers. In turn, many mature sectors offer operational acquisition opportunities, often at lower price points which in turn are more suited to smaller managers and new entrants wanting exposure to Australian alternatives.

CAPITAL MARKETS ACTIVITY WILL BE SIGNIFICANT In 2024, Cushman & Wakefield project there will be significant capital markets activity within the alternatives sector, particularly in the second half of the year. Across most alternative sectors, assets remain tightly held by investment managers, limiting direct sales activity. Although, some portfolio optimisation is expected to occur in 2024 driving direct volumes, the bulk of capital flow is projected to be accounted for by re-capitalisations and new fundraising. Operators and owners are anticipated to seek capital to adjust their portfolios, reduce debt levels, fund development pipelines and selectively undertake acquisitions. Pleasingly, global capital is expected to gravitate to established operators boasting substantial scale, robust pipeline and strong management expertise via M&A, portfolio acquisitions or entering joint venture relationships. In addition, it is anticipated that the potential ongoing global convergence of infrastructure and real estate sectors into the broader category of 'real assets’ is a trend which may also contribute to capital allocation. Alternatives are well placed to benefit from this restructure given several key alternative sectors straddle the two universes of infrastructure and real estate. This style of asset is increasingly becoming regarded as ‘infra-lite’.

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CUSHMAN & WAKEFIELD