New Investment Trends for Commercial Real Estate in 2020

Residential investment is establishing itself as a global real estate asset class. In this year’s Attitudes Survey, 59% of respondents said that UHNWIs were becoming more interested in investing in purpose-built student accommodation (PBSA); 60% cited more interest in the private rented sector (PRS); and 60% in senior living. 

That interest is in turn reflected in investment levels: private investment rose by 30% in the four years to 2019, according to RCA, taking total global investment last year to US$110 billion. 

James Mannix, Head of Residential Investment and Development at Knight Frank, says: “Investors are looking for assets that provide an income in a world where interest rates and bond yields are low or negative. This sector, where performance is tied to fundamentals such as education, rising employment and the ageing population, provides an investment linked to a demographic rather than an economic cycle.” 

UHNWIs in Africa and Europe are the most interested in investing in student and retirement housing, followed by those in the Middle East, while UHNWIs in Latin America and Africa are most interested in investing in the PRS, according to the Attitudes Survey. “Recently we have seen private wealth from Singapore looking at global multifamily or PRS assets, while investment is coming from the Middle East into the UK and the US,” Mr Mannix says. Looking ahead, here are five areas that Knight Frank’s global investment experts believe offer significant opportunities: 

Madrid, Spain

Population growth coupled with high levels of urbanisation have driven housing demand in the Spanish capital over the last decade. This comes amid rapid expansion in the rented sector, up to 23% of households from 20% in 2010, spurred by changing market fundamentals in the wake of the financial crisis – thus making the PRS an opportunity area.  

Humphrey White, Managing Director at Knight Frank Spain, says: “We are seeing real opportunity for PRS schemes offering smaller to medium-sized units in the city centre, as well as well-connected locations in the south east and south west of the city, given the high demand and lack of supply.” 

PBSA is a more established market, accounting for around 31% of the city’s beds. However, some of this stock is growing old, and planning regulations for new stock are favourable. Mr White says: “A surge in domestic students and continued growth of international students has resulted in a dynamic market and an extended cycle within this asset class.” 

Florida, US  

The US has a well-established senior living sector, which has long been a strong investment choice. Like many countries, it also has a rapidly ageing population: the number of people aged 65 and over is set to nearly double over the next 40 years. “Senior living is a sophisticated and deep market,” says Norm LeZotte, MAI, Senior Managing Director, Valuation and Advisory at Newmark Knight Frank. “Investors understand the operational aspects of the industry, and so REITs and institutions continue to invest. We are also seeing the arrival of overseas investors.” With their temperate climate, the “sunbelt” states of Florida, Texas, California and Arizona offer the best opportunities. Florida has an additional advantage as there is no state tax levied on income, and Miami is especially attractive for its international community and amenity.  

Melbourne, Australia

Victoria is fast becoming the education capital of Australia, with a 12.5% rise in the number of international students – especially those from China and India – enrolled in higher education in the year to September 2019. This is one of the trends behind the growing attraction of PBSA in Melbourne as an investment opportunity. Michelle Ciesielski, Head of Residential Research at Knight Frank Australia, says: “PBSA has matured as an asset class in recent years, with exceptional facilities being delivered to the market. This coincides with the rise in surcharge duties and fees for international purchasers of residential property. As a result, there is less investment coming into the residential market by parents looking to send their children to Australia to study, and a resulting rise in the demand for PBSA.” 

Dublin, Ireland

Strong economic growth and high levels of employment, combined with a population boom and increased levels of urbanisation, have underpinned growth in demand for housing in the Irish capital. Demand for flexibility of tenure, as well as affordability constraints, have led to significant PRS growth. Some 25% of households in Dublin now rent privately, rising to 60% for the under-35s.

At the same time, tax changes have led to a sharp decline in the number of buy-to-let landlords, creating real opportunities for investment into institutional-grade PRS. James Meagher, Director, Residential Capital Markets, Knight Frank Ireland, says: “PRS investment demand in Dublin reached €2 billion in 2019. With the structural deficit in housing stock, we anticipate the current investment appetite to remain for the next five to seven years.” Dublin is also a premier global city for higher education. “Investment in PBSA is well-established, with a mix of domestic and international capital accounting for the delivery of 6,000 new beds over the last three years,” says Mr Meagher. “While some players will continue to own and operate these assets, others will certainly look at disposals which will create opportunities for buyers in 2020.” 

London, UK 

While new development has been constrained by planning considerations, the number of students coming to study in the capital continues to rise, creating opportunities for investors in PBSA. James Pullan, Head of Student Property at Knight Frank, says: “Investment continues to flow into the London market, with established assets in great demand.” 

With the proportion of households in the PRS forecast to rise to 40% by 2030, and increased taxes and slimmer reliefs for buy-to-let landlords leading to a fall-off in the supply of individual units, there is more opportunity for investors to provide institutional-level rental blocks. 

Senior living is a growth area, with buyers looking to downsize to purpose-built accommodation that combines extensive amenities and, if needed, care, with proximity to the capital’s attractions. “There is capital searching for income, and, for many investors, residential investment meets their long-term criteria,” says James Mannix. “We forecast for the UK as a whole that total assets and capital committed in this sector will reach around £146 billion by 2025.”