Private Investors accounted for a quarter of all commercial property deals last year, contributing an estimated $153bn of commercial property deals transacted in 2014. Many of these transactions were funded by Ultra High Net Worth Individuals (UHNWIs) – those with $30m in assets or more – through family-owned funds, companies or private offices.
The figure represents a 7% rise from $143bn invested by UHNWIs the previous year, contributing to an estimated total of $646bn worth of commercial property deals conducted throughout 2014.
The results of the Knight Frank Wealth Report’s Capital Markets Survey show UHNWIs are now looking beyond prime or trophy offices and retail space as a safe haven for their funds; they are prepared to look up the risk curve to non-core locations.
An increased risk appetite may mean moving outside a capital city’s CBD area, where yields have become increasingly compressed, or heading into secondary cities where better value and higher returns are available.
In addition to moving away from more traditional markets, UHNWIs are increasingly allocating funds to property investments outside their own country. More peripheral markets such as Ireland and Spain are benefiting from this trend.
Demand for alternative property assets is also growing, and is leading to more private investment into business-critical opportunities like health care and student accommodation.
James Roberts, Chief Economist at Knight Frank, said: “UHNWIs are adopting increasingly sophisticated investment strategies, and sometimes this approach involves the kind of active management previously restricted to institutions and funds.
“Examples include refurbishment and development projects – where others may see down-at-heel neighbourhoods, he sees opportunities for regeneration and social change.”
According Knight Frank’s latest Attitudes Survey results, the UHNWI hunger for property as an investment remains undimmed. Falling oil prices should free up more capital to be spent on consumer goods, which should in turn present more property opportunities to feed the increasingly hungry private investor.
James Roberts, Knight Frank’s Chief Economist, said: “If I had to pick a single word that could apply right across the global economy at this time it would have to be ‘uncertainty’. This is why investors are looking at real estate.
“For the investor in the Middle East it is uncertainty over the situation in Iraq and Syria. To the European or Japanese investor it is the move towards QE and whether this will end stagnation. Conversely, the American or Briton faces uncertainty on how best to invest to capitalise on an unfolding recovery.
“A real estate investor knows that if the lean years are to continue, one buys the safe prime assets, like offices in Manhattan or shops on the Champs-Élysées. If the economy is about to improve, the riskier but higher-yielding properties are where opportunities lie.”
Investors are already adopting a higher risk profile, as evidenced by the $619bn of global commercial real estate sales which represented an increase of 7.5% from 2013, with value-add assets increasingly popular. Value-add is any building where the purchaser can grow the investment return via construction, changing to another use like residential, or signing up higher paying tenants.
James Roberts said: “I see global sales rising by another 6% in 2015, with value-add rising further up the agenda. Private investors are following the trend towards risk, which was not typical of previous property market cycles.
“Traditionally, the private investor has targeted prime assets, but last year a quarter of global commercial sales were to private buyers, despite the move towards risk evident in numerous markets.
“China is adapting to a new pace of growth, but the country’s projected GDP increase this year from the IMF is about the equivalent of adding 18 new corporations the size of General Motors. China is far from a busted flush and actually somewhere to look for long-term opportunities.
“That office rents have edged back rather than slumped in Shanghai and Beijing during challenging market conditions bodes well for the long term, so I see resilience in key centres. India’s property market has experienced a marked slowdown.
“Opportunities are opening up as the global economy moves into a new cycle. Development in particular is rising up the agenda in the real estate world, and UHNWIs will be part of the new wave of building.”