When annual private investment in global commercial property broke through the $300bn barrier 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 ultra-wealthy 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 $335bn in the 12 months through Q3 2019 according to RCA data, even as the shadow of global economic slowdown, trade wars and geo-political 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 $200m, investors are saying “we can own and manage these things ourselves”.
The movement extends beyond direct investing through family offices, however. The wealthy are putting far more resource into property funds, while also funding property companies, and putting more money into private equity funds.
Private capital favoured purpose-built residential accommodation in the 12 months through Q3 2019, investing $115bn in the sector. This was followed by offices, with $104bn invested.
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%-plus – said they were planning to increase their allocations to property in the near future.
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.
International institutions bidding for London trophy properties against Amancio Ortega’s Pontegadea have become accustomed to losing out. Pontegadea is perhaps the best known of a new breed of family offices that look increasingly like the institutions they are, in many cases, displacing. In the past 12 months, we’ve seen staff joining them from leading global private equity investors, and they’re more competitive.
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. 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 looked to 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 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. These are markets where we see demand growing in 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.
While $500m deals involving the titans of business dominate headlines, a new generation of wealth, particularly across Africa and Asia-Pacific, are clubbing together to invest directly.
We are seeing a huge amount of syndication and grouping together to form investment clubs. This has increased bidding activity for larger assets. Middle Eastern investors seeking access to European markets are following suit.
It’s about diversifying the risks, and sharing the expertise.
Rory Penn is head of private office at Knight Frank
