Momentum to continue in Specialist Sector investment – with an increase of 10% forecasted, reaching £14.3 billion in 2016

Total investment into the specialist sectors will increase by 10% year on year to reach £14.3 billion by the end of 2016, says Knight Frank in a new research report.

In 2015 18.3% of all commercial property investment transactions were in specialist property, with huge levels of inward overseas capital accounting for an average of 62% of all transactions. All four core sectors, hotels, healthcare, student property and automotive, saw volumes exceed their five and ten year averages, with hotels and student property markets setting new benchmarks in the last 12 months. There has been a significant shift to the non-traditional asset classes by investors – since 2006, £46.6bn has been invested into these sectors, with a record £13bn invested in 2015 alone.

Momentum will continue across all specialist sectors, with a shift in buyer profile already witnessed, as debt-backed investors have entered the market along with the UK institutional funds. Buyers are now viewing specialist sectors as a ‘defensive’ asset class – providing long, stable income flows.

While overseas investors from North American Funds and Asia-Pacific investors will be prominent, evidence of growing momentum is provided by the scale of M&A activity occurring at operational level in these sectors – not only in private equity, but also REITs, hedge funds, family offices and US trade interests.

Key forecasts:

·     Healthcare: The market will continue to mature with the emergence of operating companies, brands, new housing models and most notably urban care. Yields have hardened but will hold.

·     Student: There will be a rise in institutional and international investors, more student property REITS, consolidation of assets (more stocked owned by less investors), polarisation, the London development pipeline will fall and rental uplift will reach 3.5% in 2016.

·     Hotels: Significant market opportunities will emerge through the break-up of portfolios, whilst sale and leaseback activity will also increase.  Operator consolidation will also be evident allowing the sector to respond to threats from disruption taking place in the sector.

·     Automotive: 2016 will witness the strongest ever investment yield for a rack-rented new lease outside of London, there will be increased opportunities for investors as operators release capital from real estate assets, rental growth for prime assets will outperform the all property equivalent for the full year at 8%-10% and there will be growth in alternatively fuelled vehicles (expected to be 1 in 20 by end of 2016) which will deliver further performance in this sector.

Shaun Roy, Head of Specialist Property Investment, commented: “The market has changed. Investors primary focus now is the longevity and durability of their income return and the specialist sectors are ideally suited to offer this style of investment product to the market.”

Lee Elliott, Head of Commercial Research, Knight Frank added: “The momentum that has built within the specialist property sectors will be maintained.  Despite emerging headwinds such as the EU Referendum and the operational effects of the National Living Wage, the inherent qualities and drivers of these sectors will be alluring to a broad array of investors.”