Global property consultancy Knight Frank has recently launched the results of its latest survey, which reveals that investors plan to significantly increase their exposure to the living sectors – including the student property markets.
Knight Frank is forecasting that £45bn is set to enter the market over the next five years.
Knight Frank’s survey included the responses of 50 leading institutional investors who have a combined total of over £76bn worth of living sectors assets under management.
The survey found that 71% of respondents expect total investment into living sectors to have ‘significantly increased’ between now and 2028.
“Over the past five years the living sectors have experienced a steady rise in investment, from less than £8bn in 2018 to more than £15bn last year. Our survey points to further growth over the medium term. There is a compelling case for investing in assets that benefit from changing ways of living and which provide strong counter-cyclical features and inflation-matching characteristics that can help investors achieve consistent returns.”Oliver Knight, Head of Residential Research, Knight Frank
Diversification within Living
At present, just 21% of Knight Frank’s survey respondents currently invest across all three primary living sectors (Build to Rent, seniors housing and student property).
The firm is expecting this number to rise to 52% by 2028.
PBSA is expected to remain central to investors’ strategies over that time, but seniors housing and single-family rental are expected to see the largest growth.
“The UK’s living sectors have experienced a surge in investor enthusiasm and unprecedented levels of growth over the past five years. Established players are expanding aggressively, and global newcomers are seizing opportunities. That said, the growth of the sector hasn’t been without challenges – notably surging debt costs and regulatory barriers. But the future of the living sectors is bright: interest rates will peak, and fresh capital will flood the market in Q4 2023. Equally, untapped equity hints at a transactional resurgence. This is a unique moment for investors to acquire living sector assets at competitive prices, while reasonable inflation growth over the next few years will act as a tailwind for savvy investors, enhancing the real income generated from assets and bolstering long-term investment returns.”James Mannix, Global Head of Living Sectors, Knight Frank
Barriers and challenges
Challenges hindering investment include the cost of finance (62%), planning issues (57%), and the availability of operational stock (50%).
Respondents also express concerns about potential new regulations (68%) and affordability pressures faced by tenants (60%).
Rising operational costs (58%), fire safety requirements (42%), and sector-specific challenges add to the complexity.
Investors look to increase financial leverage
Access to the debt market is a priority for investors, with 71% indicating its importance in their investment strategy.
As UK inflation eases and interest rate expectations decline, the cost of debt is expected to decrease, resulting in increased transactional activity levels.
Survey responses indicate that 36% of investors plan to increase their requirement for debt in the coming year.
Of those, 56% plan to use debt for new development, and 44% plan to use it for acquisitions.
“This survey confirms that the cost of debt is at the forefront of investors’ minds, and understandably so. But at the same time, lender appetite for funding the living sectors has never been stronger and with a reduction in deal volumes in 2023, lenders are beginning to reduce margins in order to win funding mandates in these sectors. Now is the time to capitalise on this liquidity and optionality in the debt market.”Lisa Attenborough, Head of Debt Advisory, Knight Frank
Relevance of ESG
Environmental, Social, and Governance (ESG) considerations continue to guide investor decisions, with 36% of respondents indicating that sustainability will significantly influence their investment strategy in the next three to five years.
Additionally, 95% believe that ESG credentials will create a value premium for their assets, suggesting that their standards are becoming higher to ensure the future viability and liquidity of their investments.