What property investments belong atop private capital’s post-covid shopping lists?
We put that question to participants in a PERE Asia Webcast this week. Two of the top answers were predictable, if not expected: logistics and credit.
After all, e-commerce-occupied warehouses have long been the darlings of commercial real estate and are now rendered essential with so many people confined to their homes. Meanwhile, credit distress has already led to a slew of forced sales, making real estate debt an attractive strategy. However, a third preference of the participants from PERE’s webcast was one scarcely mentioned in the upper echelon of real estate investment priorities: data centers.
Historically, data centers and other digital assets have been an afterthought for many private real estate investors. Yet, this crisis has shown just how much can be done online. Work, socializing, entertainment and commerce have all shifted into the digital realm, which, as we explore in this month’s cover story, have given digitally supportive real estate its moment in the sun.
Here are five reasons why digital assets will be higher priorities for institutional investors and their managers for the foreseeable future.
Plenty of runway: Each element of the digital real estate universe is backed by strong secular tailwinds. Data centers have flourishing, high-credit tenant bases in the cloud service space, with groups such as Amazon Web Services, Microsoft Azure and Google Storage. Towers and small cells are poised to grow in both emerging regions where mobile phone adoption rates are still low, as well as in developed countries in need of network density. And fiber is the lifeline that supports it all. Across the board, capital needs are great and the potential returns even greater.
Difficult to disrupt: If the covid-19 pandemic has highlighted anything about the digital real estate universe, it is resilience. Stock prices for Equinix and Digital Realty Trust, the two largest listed data center companies, are up 9 percent and 14 percent, respectively, since the beginning of March. Meanwhile retail giant Simon Property Group is down 47 percent, healthcare-centric Welltower is down 32 percent and multifamily owner Equity Residential is down 18 percent. Even the logistics juggernaut Prologis only recently returned to its March 2 valuation. And, while other property types face existential questions coming out of this crisis, those in the digital realm can be assured that the only changes to their business plans will be in a positive direction.
New structures: Traditionally, investment in digital assets has been limited to publicly-traded companies and the large institutions that could partner with them in joint ventures. But that is changing. Los Angeles-based manager Colony Capital partnered with Digital Bridge, a Florida-based firm, to raise $4 billion for a digital-asset-dedicated fund, while Brookfield Asset Management has made data centers a focus for its $20 billion infrastructure fund. These large commingled funds provide an early model for others to follow.
Money talks: Institutional investors that put capital toward investment in digital assets would be in good company. Mobile service carriers in the US alone have invested $315 billion of their own money into building networks and they plan to invest billions more in the years ahead. The Chinese government also plans to spend close to $30 billion on high-tech infrastructure this year alone to spur an economic recovery.
5G fortunes: Although much has been made about 5G technology, it has not yet been made widely available. In fact, the standards for it are not even finalized. Still, what is known about 5G is that it will facilitate myriad new capabilities. And all of that will require more digital assets to facilitate greater transmission and storage.
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