EXPERT Comment

Why purpose-built real estate is a hot-spot in the private markets   

As modes of living have changed over the years, so too has the real estate investment industry. Driven by changes to living culture, purpose-built real estate funds are beginning to gain recognition, opening up new and unprecedented levels of investor interest in the private markets. Peter Young, co-founder and CEO of QIP, writes

Peter Young,
co-founder and CEO of QIP

Private banks and wealth managers need to sit up and recognise these changes to quickly capitalise on the opportunity presented to them – or miss out to those that will.

The appeal of purpose-built accommodation stems from a host of new, bite-sized investment opportunities emerging around residential assets that represent a far cry from traditional illiquid, low-yield, single-investment homes. Not to mention the ongoing COVID-related concerns which continue to hang over the office space and retail real estate sectors – concerns that position purpose-built accommodation as a haven of comparative stability.

A quiet revolution in living

The past decade has witnessed a quiet revolution in the way people are now choosing to live. The traditional house or apartment unit has begun to give way to specialised community-based living spaces where people of a similar demographic and needs-profile, be they students, the elderly or young, single professionals, may co-habit.

For those residents, the appeal is obvious. Living with people of a similar lifestyle can reduce some of the frictions and the stresses associated with traditional ways of living. It can prove more cost effective than renting a whole property, particularly in expensive cities, with co-living accommodation often up to 30% cheaper than traditional options.

Purpose-built real estate also offers greater flexibility and optionality that allow residents to curate a home environment to match their individual needs. Purpose-built student accommodation (PBSA), for example, can offer tenancy duration flexibility and give access to valuable and bespoke add-ons such as a better internet connection, and offer a web of safety within a close-knit student community.

A commercial success story

Piggybacking on its real-life utility, purpose-built accommodation is proving to be an increasingly popular and viable asset class on the private markets. For example, the UK PBSA sector is now worth around SGD$110bn ($81.7bn).

And, each year, thousands of new PBSA units are being added to meet sustained and growing demand. 2021 data has shown an 8.4% increase in university applications in the UK while 2020/2021 levels of occupancy in PBSA units remain undiminished, proving its resiliency in the face of the pandemic.

In the US co-living space, demand is proving equally strong, with 54,000 new co-living units in the planning and development pipeline.

The growth and resilience of PBSA and the purpose-built accommodation sector generally, coupled with the question marks hanging over other real estate sectors, is transforming it into one of the most attractive institutional-grade investment opportunities for private banks and high net worth investors.

Investor appeal

For investors keen to diversify away from public markets and into private markets, the high rates of transaction, portfolio capital market liquidity, and access to bite-sized investments in purpose-built properties, can prove enticing and help to meet some of the fears concerning liquidity that affect other assets in the private markets.

On average, QIP has delivered annual returns of around 13-20% for our purpose-built accommodation assets, numbers which are quite consistent with the market trend. Indeed, it’s numbers like these that are persuading private wealth managers to take notice, and to allocate increasing sums of capital into the sector.

Getting invested

The purpose-built sector is still growing and changing, but current demand and industry trends show that the sector has a bright future. As it continues to flourish, we can expect to see more evidence of its success as an independent asset class, and more established links between developers and private wealth managers and banks.

For those keen to get involved, they should take steps to educate themselves and build familiarity with the trends, the hot-spots, and opportunities available.

By acting now, however, private banks and wealth managers can be sure they’re not left behind. Sophisticated private clients with experience in real estate are already amassing knowledge of the formative trends and working with suitable broker channels and partnering directly with niche providers to invest in this lucrative sector. In-the-know private banks are even setting up dedicated arms to search out and invest into opportunity in this sector.

With the market performing so well, there’s no reason to delay; it’s time for private banks and wealth managers to get educated – and get invested in purpose-built residential sector.