Knight Frank’s global team of commercial real estate experts highlight the latest trends canny investors should look out for
When annual private investment in global commercial property broke through the US$300 billion barrier for the first time in 2017, it marked the beginning of a new era in UHNWI investing.
The 2018 edition of The Wealth Report hailed the “Goldilocks” economic conditions – not too hot, not too cold – that had powered global markets and enabled a remarkable 10% annual rise in the ultrawealthy population. This growing cohort seeking to diversify often new-found riches wanted a slice of the yield premium for illiquidity that can make commercial real estate so attractive.
But while those perfect conditions may be a thing of the past, demand continues to grow. Private investment in commercial real estate climbed to US$333 billion in the 12 months through Q4 2019, according to RCA data, even as the shadow of global economic slowdown, trade wars and geopolitical upheaval in various forms looms.
As a result, methods of investing are growing more sophisticated. An increasing number of UHNWIs, many of whom found themselves involved in structures and funds they couldn’t extract themselves from during the global financial crisis, are building family offices with sufficient firepower to dwarf that of their institutional competitors
“Rather than going to a private equity fund and handing them US$200 million, investors are saying ‘we can own and manage these things ourselves’,” says Anthony Duggan, Chief Strategy Officer & Head of Global Capital Markets Research at Knight Frank. “Private wealth tends to be quite entrepreneurial, and real estate gives UHNWIs that opportunity through asset management and repositioning – you have to be a really clever stock picker.”
The movement extends beyond direct investing through family offices, however. The wealthy are putting far more resource into property funds, whether directly or indirectly, says Mr Duggan, while also funding property companies, and putting more money into private equity funds. Respondents to The Wealth Report Attitudes Survey said that 28% of their clients’ funds were allocated to property as an investment, outstripping equities (23%) or fixed income (17%).
Private capital favoured purpose-built residential accommodation in the 12 months through Q4 2019, investing US$122 billion in the sector. This was followed by offices, with a total of US$85 billion invested. Global industrial investment reached US$42 billion and is now closing in on retail ($US45 billion), reflecting broader shifts in online shopping
The people behind the money are changing, too. Wealth managers surveyed for the Attitudes Survey said more than one-tenth of their clients were millennials, of whom over 60% were self-made to some degree, with more than a fifth totally self-made. Some 66% of respondents had seen their clients’ total wealth increase in 2019 and 59% said they expected it to grow further in 2020. A net balance of respondents – +20% – said they were planning to increase their allocations to property in the near future.
Against this fast-changing backdrop, The Wealth Report has picked four themes likely to dominate the private investment world of commercial real estate over the coming three to five years.
The “institutionalisation” of the family office
International institutions bidding for London trophy properties against Amancio Ortega’s Pontegadea have become accustomed to losing out. The founder of retailer Inditex acquired the London HQ of McKinsey in December, a year after buying the Art Deco Adelphi building overlooking the Thames.
Pontegadea is perhaps the best-known of a new breed of family office that look increasingly like the institutions they are in many cases displacing. In the past 12 months, we’ve seen “staff joining family offices from leading global private equity investors and they’ve become much more competitive,” says Alex James, Head of Private Client Commercial Advisory at Knight Frank’s Private Office. “If you want to compete globally for major real estate assets, you need key people, expertise, great governance and the ability to transact quickly.”
With sophistication comes a push into new markets As part of the clamour for better returns, private individuals are seeking more data and local knowledge in markets and sectors yet to be explored comprehensively by cross-border investors.
“There is a push to invest in local market dynamics, not just top level country- wide themes,” says James Lewis, Managing Director, Knight Frank Middle East. For Middle Eastern investors, “this was initially driven by a search for yield – as gateway cities including London, Paris and Frankfurt became very expensive, people started looking at second-tier cities, notably in the UK and Germany, such as Leeds and Nuremberg.”
Across Asia-Pacific, investors are following suit, though with current market risks it tends to be those with overseas experience that are willing to push beyond safe haven markets. “Investors with experience, particularly out of Singapore, are happy investing across asset classes in different locations, notably Adelaide or Manchester,” says Neil Brookes, Head of APAC Capital Markets at Knight Frank. “These are markets where we see demand growing over the coming years.”
Alternative sectors are the future
The push for diversification leads to emerging sectors, too. Rental property spanning student housing, co-living, build-to-rent and senior living gives UHNWIs exposure to demographics spanning the entire human lifecycle. Already, private wealth is seeking access to these markets through development partnerships or by buying income producing assets directly, though scarcity of completed product in certain markets is limiting opportunities.
“There will definitely be more movement into the specialist sectors as and when opportunities crop up,” says Mr Lewis. “Value-add investors are crying out for the right deals, and when they find them they will be eager to buy.”
Syndicates break down barriers to entry
While US$500 million deals involving the titans of the business world dominate the headlines, a new generation of wealth, particularly across Africa and Asia-Pacific, is clubbing together to invest directly and make its mark.
“We are seeing a huge amount of syndication and grouping together to form investment clubs,” says Anthony Havelock, Head of Agency at Knight Frank Kenya. “This has increased bidding activity for larger assets.”
Middle Eastern investors seeking access to European markets are following suit, particularly while interest rates remain low, says Mr Lewis. “We’ve seen these groups investing outside main cities, into business parks where they can leverage cash yields of 7%– 8%.”
Family offices have been popular among Asian investors for years but now smaller buyers are increasingly clubbing together. “It’s about diversifying the risks, and sharing the expertise,” says Mr Brookes.