Global institutional investors plan to deploy an average of £248m into UK living sectors over the next 12 months, more than double the £113m cited in 2021.
Investec Real Estate’s third Future Living report found that despite an unprecedented period of macroeconomic volatility, investors’ attitudes towards the UK living sector are at their strongest in nearly half a decade. The previous Future Living reports were released in 2021 and 2019.
Investec gathered data from 50 global institutional investors representing more than £400bn of AUM. The report’s respondents comprised pension funds, hedge funds, private equity, mutual funds, venture capital and sovereign wealth funds.
Almost two-thirds of respondents (62%) said they expect their portfolio allocation to the living sector to increase over the next five years, compared with 40% in 2021.
Subsector outlook for living
Investec found the student accommodation sector has seen the biggest shift in investor appetite. It has risen from 10th to first in terms of investor appeal in just two years. It found 59% of respondents were optimistic about student accommodation in 2023 compared with just 27% in 2021m replacing distribution/logistics at the top of the class.
Almost half (46%) of respondents said they were considering investing in co-living in the next five years. However, the report also found only 30% of respondents were particularly optimistic about co-living over the next five years.
Jonathan Long, head of corporate lending at Investec Real Estate, said: “It’s definitely a sector that’s here to stay but it’s going to take a while for it to take off. We are seeing a bit of a lag from investors in making decisions, from buying to planning to construction, which is typical of a more nascent sector.”
Meanwhile, retirement living continues to lag behind other living sectors, despite being the sub-sector where the supply/demand imbalance is most acute. According to Knight Frank, just 15% of stock required to meet demand is currently being delivered.
According to Investec, only 40% of respondents are currently investing in the sector, making it one of the least favoured sub-sectors within living, and the 7% increase on 2021 was the smallest of all the living sectors.
“Senior living requires a cultural shift that the UK is only part of the way through,” said Becky Worthington, chief financial officer at Canary Wharf Group.
“If we look 15 years ahead, I’ve no doubt it will have transformed into a far bigger investable market with more people moving into a retirement community when they are physically still active.”
It is the first year Investec has released research looking at single-family rental market, finding that 63% of investors already have exposure to it.
In the UK, investment in the sector in the first half of 2023 totalled almost £600m – up by 166% on the five-year average. A total of 59% of respondents are currently investing in the more established multi-family rental sector.
“There’s a real opportunity for single-family rental to gather momentum,” said Charles Ferguson Davie, chief investment officer at Moorfield Group. “The opportunity to buy existing houses and turn them into professionally managed, high-quality rental portfolios is what the market needs and should have had for ages.”
Financial outlook for living
A higher interest rate environment is causing a huge headache for investors, having increased from a base rate of 0.1% two years ago, with 76% of respondents saying it is a particular obstacle to the living sector’s growth – more than any other obstacle. Second was construction cost inflation (56%) followed by unattractive pricing (51%) and access to finance (45%).
Higher interest rates are forcing investors to rethink their debt strategies, with more considering undertaking transactions without leverage.
Almost three-quarters (71%) of respondents said it would be more difficult to access senior debt over the next 12 months and 59% said they would be more likely to undertake a real estate transaction without leverage compared to a year ago.
Gloomy outlook for offices and retail
The picture is far less rosy for other sectors, with the future of offices and retail highly uncertain. As 48% of investors said they plan to decrease their allocation to offices over the next 12 months, and 40% plan to decrease their allocation to retail.
The survey revealed that structural trends accelerated by the Covid-19 pandemic are driving this shift. Hybrid working patterns and significant quantities of outdated secondary stock that is not necessarily EPC-compliant are turning some investors away from offices.
In retail, property needs to be refurbished or reimagined to combat considerable headwinds, led by the growing popularity of online shopping. The study found that investors are instead being drawn to the clear supply and demand imbalances in living, which is set to be underpinned by strong rental growth.
“Living is as safe as houses,” said Simon Scott, lead director of living capital markets at JLL in the UK. “From a fundamental supply-versus-occupational-demand imbalance perspective, I can’t think of a better place to commit capital.”
He added: “Institutional fund managers are going to be increasingly investing in the living asset classes over the coming years; it’s really only a question of how much.
“I think we’re starting to get to the point, whether it’s five or 10 years away, when living will be bigger than offices – it may well be even sooner.”
Long, said: “The UK living sector has been our strongest conviction call over the past decade and it is enjoying a prolonged period of global institutional investor support. While the funding landscape has been turned upside down by higher rates and macroeconomic pressures, structural shifts accelerated by Covid-19 are redrawing the commercial real estate map and positioning living firmly in the mainstream. Investors have been drawn to both the strong rental growth prospects and the valuation resilience.”
“Comparing the findings from our third Future Living report with its previous iterations has enabled us to map a number of the trends driving investor decision-making. These latest insights align with what we continue to see as a business with investors looking past the near-term market volatility at the living sector’s compelling fundamentals.”
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