Global institutions to double investment into UK Living sector

Investors plan to deploy an average of £248 million into Living sector over the next 12 months

Global institutions to double investment into UK Living sector

Despite an unprecedented period of macroeconomic volatility, global institutional investors’ attitudes towards the UK Living sector are at their strongest in nearly half a decade, according to Investec Real Estate’s third Future Living report.

The trend is being driven by a combination of the sector’s compelling societal and demographic trends, which were accelerated by the pandemic, and an acute shortage of product.

Almost two thirds of respondents (62%) said they expect their portfolio allocation to the Living sector to increase over the next five years, compared to just 40% in 2021. Gross investment into the sector over the next 12 months is set to double compared with the previous iteration of the report, with an average of £248 million per respondent in 2023 versus £113 million in 2021.

The student accommodation sector has seen the biggest shift in investor appetite. It has risen from tenth to first in terms of investor appeal in just two years – 59% of respondents are optimistic about student accommodation in 2023 compared to just 27% in 2021 – replacing distribution/logistics at the top of the class.  This reflects the sub-sector’s compelling structural drivers, including its decorrelation from wider economic pressures, and the reversal of the short-term challenges it faced during the pandemic.

The challenge for investors will be executing on their intentions. Higher interest rates are forcing investors to rethink their debt strategies, with more considering undertaking transactions without leverage. Almost three-quarters (71%) of respondents said that it will be more difficult to access senior debt over the next 12 months and 59% said they would be more likely to undertake a real estate transaction without leverage compared to a year ago.

The picture is far less rosy for other sectors, with the future of offices and retail highly uncertain. On average, almost half (48%) of investors plan to decrease their allocation to offices over the next 12 months and 40% plan to decrease their allocation to retail.

These findings have been revealed in Living: As safe as houses – Future Living 3, a global survey of 50 global institutional investors representing £442 billion in assets under management, commissioned by Investec Real Estate, a leading UK provider of investment and development finance.

Jonathan Long, Head of Corporate Lending at Investec Real Estate, said:

“The UK Living sector has been our strongest conviction call over the past decade and it is enjoying a prolonged period of global institutional investor support. Whilst the funding landscape has been turned upside down by higher rates and macroeconomic pressures, structural shifts accelerated by Covid-19 are redrawing the commercial real estate map and positioning Living firmly in the mainstream. Investors have been drawn to both the strong rental growth prospects and the valuation resilience.

“Comparing the findings from our third Future Living report with its previous iterations has enabled us to map a number of the trends driving investor decision making. These latest insights align with what we continue to see as a business with investors looking past the near-term market volatility at the Living sector’s compelling fundamentals.”

Attitudes towards sustainability remain complex. Three-quarters (77%) of respondents say that recent market volatility and economic uncertainty has relegated sustainability down investor and corporate agendas. At the same time, 78% of respondents are likely to seek sustainability-linked financing over the next 12 months – showing that they still recognise the benefits of improving the green credentials of their portfolio.

Despite plenty of talk about ‘Levelling Up’, London is still by far the most popular location for investment in Living, although 79% of investors are allocating more capital outside London than they were 12 months ago. The only asset class where London was topped was single family rental, where respondents favoured Manchester.

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