Knight Frank predicts surge in residential investment market

Knight Frank predicts a surge in the residential investment market due to resilience throughout the pandemic.

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Covid-19 has transformed the way global institutional investors consider real estate. The residential investment market – which includes Build to Rent, student property and seniors housing – remained resilient throughout the pandemic. This has moved it from an alternative to core asset class in the eyes of investors.

As a result, capital flow into these three sectors have risen sharply. Annual investment is expected to hit a record £16.5bn in 2022, according to new research by global property consultancy Knight Frank. This would represent a 65% increase compared to 2021, when investment stood at £10bn.

This transformation from an alternative to a core asset class over a relatively short period of time is particularly remarkable, given that a decade ago, the residential investment market accounted for just 8% of total institutional real estate investment.

Knight Frank’s annual investor survey of 54 global institutional investors, which together represent £76bn of current capital committed to the sector, found that an additional £75bn has been earmarked for deployment over the next five years.

In the short term, the survey respondents said they plan to invest a record £16.5bn in 2022. This would represent a 65% increase from the £10.2bn spent in 2021. Based on the assumption that the survey represents 60% of the total residential investment market, there is over £23bn of institutional capital targeting the sector this year. In total, an additional £75bn has been earmarked by the investors Knight Frank surveyed to be deployed across residential investment sectors over the next five years; a figure that rises to over £100bn when accounting for the whole market.

Over 80% of respondents said they expected to ‘significantly increase’ their exposure to Build to Rent, PBSA and seniors housing over the next five years. New investors are also entering the space. According to Knight Frank, 23% of Build to Rent spend in 2021 was conducted by new entrants.

It is anticipated that as the market continue to evolve it will become more difficult for investors to enter. Respondents to Knight Frank’s investor survey cited the availability of operational stock (66%), competition (51%), and access to development and funding opportunities (45%) as the three biggest challenges facing capital deployment.

“As the residential investment sector evolves and becomes more mature, existing and potential investors will notice certain barriers to entry more acutely. Indeed, availability of stock and the fierce competition for it will grow; operational and development costs, fire safety issues and planning challenges will all become bigger factors.” 

James Mannix, Head of Residential Investment and Development, Knight Frank 

It is clear investors are looking to overcome these challenges through diversification. 70% of survey respondents said they anticipate being active in the single-family housing market within the next five years – up from 42% currently active.

ESG will also be a core driver for future strategies. Knight Frank’s survey showed that four in ten survey respondents said ESG would be the key influence in determining real estate strategies over the next three years. The driving force behind demand for green buildings is coming from investors, with 81% of respondents saying this group was ‘very important’ when it came to decisions around ESG. This was followed by regulation at 51% and occupiers at 32%. 87% of respondents agreed that ESG credentials would create a value premium for assets, with nearly three quarters agreeing that they will pay a premium for buildings with excellent ESG credentials.

“It is clear investors are leading the charge when it comes to ESG, imposing increasingly strict standards in order to future proof assets and reduce the risk of obsolescence triggered by regulatory changes or shifts in tenant sentiment and preferences. Longer-term, more than 60% of our survey respondents believe good ESG credentials will ultimately lead to better occupancy and tenant retention.”

Oliver Knight, Head of Residential Development Research, Knight Frank