New Commercial Investment Sectors

Private investors are taking advantage of the strong long-term performance of commercial property – and exploring new sectors of the market

Although many people will have been relieved to see the back of 2016, global commercial real estate remained a beacon of light throughout the year for both institutional and private investors. Transaction volumes were robust and returns favourable when measured against other asset classes.

Private investors have been key players in the global market for some time now, accounting for 20–25% of all transaction volumes over the last 10 years, but this rose to nearly 30% in 2016.

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From a performance perspective, it is easy to see the attraction. According to analyst MSCI, global real estate has delivered an unleveraged return of 6.3% over the past 10 years, rising to 9% per annum over the past five years (to December 2015), with star performers including Indonesia (15.3%), Ireland (14.7%) and the US (12.0%), while Australia, Canada, Malaysia, Hong Kong and the UK have also posted strong returns.

Indeed, on both an absolute return and risk-adjusted basis, real estate has performed very well against the two largest asset classes: equities and fixed income.

Even the global financial crisis only served to highlight the relatively defensive nature of real estate, with downward valuation adjustments at least partly offset by returns from income.

While the return on global equities has been nearly as strong as for real estate over a 10-year period, real estate returns really come into their own on a riskadjusted basis.

The income component, coupled with slower capital-driven cycles, makes returns on real estate much more predictable than returns on equities, with real cash flows providing a source of cash return regardless of the underlying change in asset values.

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Over the same 10-year period global bonds have benefited from similarly low levels of volatility as real estate, but the return profile has been markedly weaker over the past five years.

Looking ahead, investors are understandably cautious given weak global economic forecasts and the expectation of further geopolitical uncertainty. But despite this, significant appetite for the market remains.

Our first Family Office Investment Trends survey found that all respondents wished to continue increasing their allocations to property over the next 12 months and highlighted a number of reasons why, not least the scope this offers for acquiring tangible assets outside their domestic economy, and the opportunity to exercise total control over their assets.

So, where will these investors be looking in 2017? Knight Frank’s latest Global Cities commercial property report highlights a number of key trends for international real estate investors in the current economic environment. These include the rise of real estate as part of a wider and deeper “real asset” portfolio, alongside infrastructure investments and other physical assets, which share many of the characteristics that make property so attractive.

Also highlighted, and of particular relevance to private investors, is the rise of investment-quality “buildings with beds”. The most obvious example in this category is hotels, but clients are increasingly asking for advice on the development, purchase and management of assets such as private rented sector residential investments, student housing, senior living and healthcare facilities.

Under-supply of such assets, combined with clear demographic-driven demand trends, is attracting interest from both investors and from developers who are creating products suitable for real estate investment portfolios.

Alongside these longer term trends, we turn the spotlight on a sector we feel will become more and more attractive to private investors over the next few years: urban logistics.

This sector is undergoing a revolution as rapid urbanisation drives the growth of global cities at the same time as trends such as the explosion in e-commerce translate into demand for ever greater volumes of goods to be moved at ever faster speeds around these new conurbations.

With short reaction times and precise delivery slots becoming increasingly valuable to retailers as points of differentiation, “local” real estate storage and logistics facilities are in high demand.

Add to the mix the prospect of being able to buy urban land at a relatively low entry price point, and there are compelling reasons to invest.