Core specialist property to account for 20% of all commercial investment by 2020

The volume of specialist property investment will exceed £10 billion in 2015 and will account for 20% of the total commercial market by 2020, Knight Frank forecast at its annual Specialist breakfast event.

The core specialist property sectors – automotive, healthcare, hotels, and student property  – account for an ever growing share of the commercial market, a trend which will continue for the foreseeable future.  Key driving factors include structural changes such as the UK’s ageing population and increase in student numbers, and car sales growth, combined with increased occupier demand for high quality property.

The squeezing of yields within the “traditional” sectors such as retail and offices has also prompted investors to look at assets which offer better returns, not to mention opportunities for diversification.  This year will see a sharp increase in deal volumes for specialist property, along with rental growth and further yield compression.

A Knight Frank survey of investors suggested that there is a strong desire to boost allocations to non-core commercial assets including the “sleeping giant” that is the Private Rented Sector (PRS) which is currently a cottage industry worth more than £1.5 trillion in addition to specialist property around the UK.  Of particular note is the increasing interest in rapidly growing niche segments such the automotive sector.

Key highlights:

–     The automotive sector will see yields hardening further this year, alongside rental growth. Institutional funds will continue their interest and 2015 will see the largest ever volume of automotive investment transactions in the UK.

–     Care homes are set to be the best performing asset in the healthcare sector, with a new wave of domestic and international operators set to enter the market. Mental health and learning disability properties are generally undervalued and will offer potential gains to investors.

–     In London, space efficient, funky hotel formats will outperform the wider budget sector.  Emerging hotel markets, including East London and Nine Elms, will continue to thrive, while a recovery in trading performance will lead to an increase in demand for secondary locations across the UK.

–     Within student property, the direct let market is expected to be the best performing segment. Deal volumes are set to rise, with at least £3 billion worth of transactions in established portfolios expected to take place.

Darren Yates, Head of Global Capital Markets Research, Knight Frank, commented, “With improving occupier demand, easier access to finance and a greater willingness to move up the risk curve, investors’ appetite for specialist property continues to increase.   Indeed, for many investors, specialist property now forms an integral part of a core portfolio. “

Shaun Roy, Head of Specialist Property Investment, Knight Frank, commented, “The continued rise in investor interest in specialist property reflects the appreciation of these business critical assets which, when bought on sensible rent covers and on sound operational business assets, provide their owners with confidence in the durability of income. Moving forward to 2020 we expect to see this sector experience strong growth within the total market, and to become an even more significant part of investor’s portfolios. ”