Billionaire's blueprint: How ultra-wealthy investors are transforming the commercial real estate landscape

Paddy Dring, an expert with 30 years in global luxury property markets and Joint Head of Knight Frank’s Private Office, recently advised a long-standing client on where best to invest some available capital.   

It’s a frequent requirement that Paddy and his team help their clients with, but the recommendation in this case may be somewhat surprising – to invest in a well-known supermarket brand in the UK’s Home Counties.

Conversations of this nature, where private investors are exploring commercial real estate opportunities, have become increasingly common among ultra high net worth individuals (UHNWIs). In a landscape marked by market fluctuations and economic volatility, private investors are seeing commercial real estate as an important part of their property investment strategies, as they look to maximise returns and spread risk in a changing global market.

Knight Frank’s latest Wealth Report underlines this trend, revealing that private investors have been the most active buyers of commercial real estate globally for the past three years, surpassing institutional and public investors to reach a 49 per cent share of the total investment in 2023, the highest on record.

For this client, it’s easy to see the appeal, as Paddy explains, “It’s a reputable brand they understand, offering 20 years of income that can effectively offset the running costs associated with their lifestyle assets.”

Alex James, Head of Private Client Advisory – Commercial at the Private Office, notes that private investors maintained prominence in the sector even in the face of a 46 per cent dip in global commercial real estate investment in 2023. “While global investment was relatively soft, the fact that private investors were the most active in 2023 is perhaps unsurprising,” he explains. “This group is relatively well positioned to transact in a higher interest rate environment, as private capital is typically less reliant on debt than other investment types.”

The Wealth Report also identifies a historic shift in investment preferences, with industrial and logistics leading for the first time, accounting for a quarter of all global investment (US$174 billion). Despite an overall decline in total investment across sectors in 2023, the living sectors remained resilient among private buyers who capitalised on reduced competition.

Here, Alasdair Pritchard and Alex James from Knight Frank’s Private Office unravel the rationale behind this growing trend, exploring shifts in investor preferences, identifying growth markets, and highlighting the crucial role of the Private Office in assisting clients.

What factors are driving the surge in private capital investments in commercial real estate to a record high?

Alex: In recent times, investors have diversified their portfolios across bonds, equities, and cryptocurrencies. Real estate, prized for its tangibility and stability, is now a crucial component of these diversified strategies. It is particularly attractive to those planning for retirement, offering a reliable income yield that often outperforms other investment avenues. The trend is further fuelled by families emphasising wealth preservation, deeming real estate – both residential and commercial – as a valuable asset for building intergenerational legacies. Despite market fluctuations, the global investment community continues to see the UK as a safe haven, sustaining robust demand for its real estate. Notably, private investors are inclined towards longer investment horizons that can span decades, minimising reliance on debt compared to other investor groups.

Alasdair: The impetus behind this trend is a fundamental market shift triggered by rising interest rates. Private investors, free from bank finance dependencies, can swiftly capitalise on this scenario through cash transactions. There’s considerable appeal for private investors to acquire tangible assets, particularly in a climate where paper values, such as those linked to NASDAQ or FTSE stocks, can fluctuate significantly. The current environment presents a prime opportunity for affluent private investors to diversify their portfolios into real estate, thereby spreading risks and yielding stable returns – particularly as investors navigate an increasingly globalised world, managing multiple primary homes and diversified real estate holdings across various sectors and regions.

How does the Private Office assist clients in this area?

Alasdair: We are the linchpin that unifies Knight Frank's services for UHNWIs, covering everything from acquiring primary and holiday residences to securing accommodations for staff. Our role often extends beyond facilitation; we’ll often act as devil's advocates, leveraging our market research and expertise to challenge preconceived notions and delve into clients' underlying motivations, be it wealth preservation or inheritance plays. Our aim is to add substantial value to our clients' portfolios, navigating factors such as purchase tax, inheritance tax and currency fluctuations to optimise their real estate transactions.

Alex: Most of our clients are time-poor, so our focus is on streamlining processes to simplify their lives. Beyond conventional real estate holdings, our services extend to clients with businesses that own or lease real estate. For example, a client may opt to purchase a hotel instead of a traditional home; we have the ability to flex to our clients’ unique preferences and requirements.

The Wealth Report highlights living sectors as a top investment area. What opportunities and challenges are emerging in this space?

Alex: The 'beds and sheds' trend is gaining momentum, marked by heightened investor interest in industrial logistics and residential spaces. The post-Covid return to cities has led to increased demand for housing, particularly in major urban centres. Additionally, the growing need for senior housing and care facilities presents significant investment prospects. Another trend is the surge in hotel investments, influenced by the uptick in global travel.

Alasdair: Serviced apartments, hotels and prime office buildings, especially in locations like Mayfair, are typically the entry points for private capital. Investors seeking longer-term, hassle-free income are turning to 'easier' assets such as supermarkets, logistical warehouses, and student accommodation. While these assets are less demanding in terms of maintenance and asset management, they still require a seasoned approach and a well-rounded team to navigate the intricacies of these investments.

Are you witnessing any changes in the geographical locations that investors are targeting?

Alex: Over the recent months, there has been a noticeable strengthening of domestic markets for private capital. UHNWIs in countries in the US, Europe and the UK are increasingly recognising opportunities in their home markets, driven by price reductions. After 12 or so years of a prolonged low-interest-rate environment that led to significant private capital selling off investments, there's now an increase in domestic capital being directed into real estate due to the changing market values and opportunities that have arisen.

Alasdair: I've observed a distinct shift in investors' geographic preferences. For example, Saudi clients are inquiring about the Madrid office market. Asian clients are showing interest in the Paris retail market. The availability of data has made the world smaller, and clients will often talk amongst themselves. There's a keen interest in growth markets, particularly in the Gulf region, spanning logistics, offices, and hotels. Dubai, in particular, is regaining prominence. It seems logical for many UHNWIs to explore opportunities in logistics, given the evolving market dynamics.

Where do you anticipate this trend heading this year?

Alex: It is likely that cities such as London and New York will continue to be favoured destinations for private wealth investment, given the opportunities stemming from decreased property values. In the face of evolving market conditions, these cities remain familiar choices for investors.

Alasdair: A market that has intrigued me in recent years is the Italian residential market. Fuelled by tax considerations, Italy's favourable res non-dom tax movement, now resembling Switzerland's, is capturing the attention of investors. When examining the fundamentals, real estates in Italy still present comparatively affordable options. It's undoubtedly a market to watch.