Cushman: the three investor ‘types’ by capital markets preferences

Typical lot sizes, the investment into portfolios, the average portfolio value, London’s dominance and the inflows of international and institutional capital all help create a more rounded view of UK real estate investment, explains Cushman. The three distinct investor groupings are:

  • Group 1. Cushman says investors in offices, retail and high-rise residential form a distinct group. These property types have large lot sizes, and rely chiefly on sales of individual assets, rather than portfolios. Total investment volume only had a small influence on the groupings – a telling sign that liquidity had limited use in explaining the differences in property type characteristics, says Cushman.
  • Group 2 has the opposite traits to Group 1. Here, the share of portfolio deals, the average portfolio value and the share of foreign ownership is crucial. Portfolio deals in Group 2 were relatively small and typically bought by domestic buyers.
  • Portfolio deals were also dominant in Group 3, but those deals were large. And foreign investors were more prevalent. Some property types had subsectors fall into different groups. Hotels were split between Group 2 and Group 3. The domestic investors in hotels had a distinct focus on smaller, limited-service hotel assets (i.e. no restaurant). Foreign buyers and sellers traded large portfolios of full-service hotels with a slightly stronger bias towards London.

David Haynes, International Partner, Capital Markets, Cushman & Wakefield, wrote:

“Investors considering Group 1 investments need to be able to cope with the concentration risk of large lot sizes, but, in turn, they can selectively invest in high-quality assets that meet their requirements. Group 2 investments are likely to be more sensitive to domestic investor sentiment and regional demand drivers. Lot sizes and portfolios are smaller, leading to greater diversification benefits for the capital required.

“Group 3 investments tend to be very large, often including operational responsibility and attract international competition among bidders. However, these property types can offer diverse portfolios and high-quality income streams.”

“The tactics needed to invest in each property type differ greatly. High-rise residential investment would likely involve building up the allocation asset by asset. Lot sizes are large, and London is a big part of the market. But investors should take comfort from how familiar those traits are to office investment.

“Understanding these capital market traits should help guide future investment strategies. Investors are more likely to invest strategically – picking one specialist sector and investing at scale, rather than try to stretch a small allocation across a wide range of property types. Likewise, sellers should keep this in mind when planning their exit.

“Meanwhile, the investment trends of the last decade have permanently changed the UK real estate investment market. Alternative real estate is increasingly liquid, international and institutional.

“The low-yield environment, short leases in mainstream assets and investors taking direct responsibility for asset management should ensure alternative real estate continues to develop in the same way it has done over the last decade. These secular trends have great inertia, which should ensure these specialist sectors can produce competitive total returns in the long run.”

james.wallace@realassetmedia.com