What are specialist real estate assets?

Despite the geopolitical uncertainty, the appetite for long-term investment has remained positive. In the UK, investors are seeking out long-term, safe investments and this in turn is driving the demand for specialist property assets. Investment in UK commercial property volumes dropped by 35 per cent last year to £46 billion (Dh217 billion), however, £10.5 billion (22.7 per cent) of investments were in specialist property — a new high.

The demand for specialist property is expected to continue going forward. Investors will be drawn to these types of assets, which offer relatively longer lease terms and index-linked rents. Income returns within the sector reached 5.7 per cent last year, exceeding the traditional commercial sectors, a characteristic which will be particularly important in ensuring specialist property’s pace as a highly sought after commodity.

According to Shaun Roy, head of specialist investment at Knight Frank who authored the Specialist Sector report 2017, “A diverse pool of major players from across the investor spectrum, have been drawn to the opportunity presented by the specialist sectors.”

The sectors are all, in their unique way, benefitting from the changes in demographics and a shift in consumer behaviour. While disruptive technologies have in some ways impacted many commercial property sectors, the business-critical nature of specialist property will ensure that the attraction is preserved.

The UK setting

The UK’s commercial property volumes decline represented the end of three consecutive years of growth. This reflected growing uncertainty surrounding the UK’s decision to exit the European Union and forced some investors to reassess the pricing of acquisition targets. However, the slowdown in the investment market during the summer months did inadvertently create a catalogue of available assets marketed at “Brexit-factored” prices. This was pivotal in delivering the strong uplift seen in the fourth quarter, which represented the fastest quarterly growth in investment volumes for three years.

The changes in the wider market last year was telling, in that a number of vendors were reluctant to deploy their income-generating specialist assets into the market. This was instrumental in preventing further transactional activity. However, four of the specialist sectors (see box) saw investment volumes equal or exceed their five- and ten-year averages, which suggest that transactional activity last year continued to outperform preceding years.

Additionally, the automotive sector recorded its highest level of investment, with £800 million transacted last year, which is up by 82 per cent on 2015. Student property recorded its second-highest level of investment with £3.1 billion transacted. When contextualised against the wider commercial property investment market, specialist property accounted for 27.5 per cent of the total last year.

Overseas investors continued to dominate, with £24 billion directly invested in UK commercial property last year, accounting for 49 per cent of all investment. The devaluation of the pound against other major currencies in the second half last year was key in providing some relief for many foreign investors who have found buying opportunities extremely limited, particularly in London, and for those who have overlooked the UK market altogether.

Going forward, the competition for yield in a low-growth and low-yielding environment is likely to propel UK property, particularly across the key regional centres, to the top of the shopping list for many investors.”

Middle East demand

In the Middle East, where there is a general lack of institutional investment opportunities across real estate sectors, the alternative sector has seen significant interest, mainly focused on the education sector. The long income on offer differs acutely from the short leases generally witnessed in other real estate sectors and, therefore, provides an attractive balance to investors looking to increase their average unexpired lease length across portfolios.

The market has also started to see more opportunities, as operators begin to be more open to sale and leasebacks and alternative ways of financing business expansion through real estate disposals. With the growth in maturity and depth of the specialist sectors globally we expect to see continued strong interest in the Middle East for alternative types of real estate. Middle Eastern investors have historically invested heavily in alternative real estate sectors and we see this trend continuing.