Sheds and beds are expected to top capital deployment lists for cross-border capital this year, with the UK set to be a key beneficiary.
Global private equity flows into key locations across mainland Europe and the UK could be the highest since 2021, Knight Frank said, driven most strongly by the investor group’s appetite for logistics, which is expected to attract 51% of total capital.
Around a quarter (24%) of pan-European bound global private equity capital is focussed on the residential sector, led by the UK, with 14% set for the living sectors, excluding student accommodation, and 10% to purpose-built student accommodation and other asset types such as built-to-rent.
Knight Frank said 64% of respondents to its Active Capital webinar asking what three sectors will they be targeting over the next 18 months identified the living sectors as a top three target.
On the basis that some markets remain nascent and not all investors responding have experience, this may provide opportunities for joint ventures.
But the firm also believes that investors have only a six to nine-month window to capitalise on current pricing amid an environment of thinner international competition.
Certain markets could even bottom out more quickly and see a quicker snap back in liquidity.
Knight Frank’s Active Capital research forecasts that the US will be the top source of cross-border capital this year, followed by Singapore, Canada, Japan, and the UK, respectively.
Japan could see its best year on record for outbound flows, with Japanese investors set to mainly target the United States (35%), the UK (26%) and Australia (19%).
The UK is set to be the biggest beneficiary of US capital, with $13bn (£10.4bn) waiting to be deployed into the country, compared to $10bn in 2023. This includes $7bn from private equity, with a particular focus on logistics.
This will be followed by the living sectors, offices, hotels and retail. Elsewhere, 12% ($1.9bn) of outbound US private equity capital will target commercial real estate opportunities in Germany, and 10% ($1.6bn) has been set aside for Spain.
Spain overall could have its best year since 2019 for inbound commercial real estate investment volumes.
Victoria Ormond, Knight Frank head of capital markets research, said: “We predict a six to nine-month window marked by thinner competition and strategic opportunities.
“These are particularly in the residential, logistics, education, healthcare and lending space or ‘beds, sheds, eds, meds and creds’ sectors, where there are structural tailwinds.
“Pricing opportunities, private capital, polarisation and loan maturities will all be key in shaping market dynamics over the year ahead, as well as selective contrarian investing.
Ormond said that Knight Frank predicted logistics and living sectors to be the two top sectors for inbound flows, followed by offices, retail and hotels, respectively, the latter two sectors potentially seeing the best year in a while in some locations.
She added that the company forecast the US, UK, Germany, Australia and Spain to be the top five destinations for inbound capital, with the US, Singapore, Canada, Japan and the UK the top 5 sources of cross-border capital.
Ormond said: “Japan in particular could see a record year for outbound investment supported by favourable swap rates, with the majority of capital set to target the US, UK and Australia.”
Neil Brookes, Knight Frank global head of capital markets, said: “There is no shortage of dry powder following a period of relatively subdued inactivity amongst several global investors over the past 18 months, with many well below their deployment targets.
“Given the shortage in investment grade supply in many markets, we expect to see buyers increasingly taking on development to build out stock, before exiting through sale to institutions or more passive investors.”
“Additionally, investor groups such as pensions funds [will be] looking to grow their global beds and sheds portfolios, in many cases through jvs, because of secular tailwinds fuelling income and capital value growth prospects.”
James Mannix, global head of living sectors at Knight Frank, said: “With 64% of investors surveyed identifying the living sectors as a top target over the next 18 months, it’s clear this asset class remains highly sought after.
“The strong fundamentals driving demand for the living sectors are compelling. Demographic shifts and affordability issues are making rental more appealing across all age groups, while consumer preferences are tilting towards flexibility and amenity-rich rental living.
“While some markets are still nascent, the living sectors are seen as providing some of the best countercyclical opportunities amid the current economic climate.”
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