What sustainability in capital markets means for private investors
With a quarter of Ultra-High-Net-Worth Individuals (UHNWI) looking to invest in commercial property in 2021, Flora Harley, deputy editor of The Wealth Report, asks Victoria Ormond of Knight Frank’s commercial research team, about new research examining the latest trends and opportunities in global capital markets.
4 minutes to read
In 2020 a third of commercial real estate transactions involved private capital, a rising trend we have charted in The Wealth Report. Victora Ormond explores this trend and more in the recently launched Active Capital report.
You’ve just launched the latest edition of Knight Frank’s Active Capital report. Tell us a bit more about the report and why it’s relevant to readers of The Wealth Report?
Active Capital draws on hundreds of thousands of data points, machine learning and proprietary modelling combined with ‘on the ground’ insights from our brokers and advisers around the globe to offer a unique perspective on the outlook for real estate investment. The research offers insights from cross-border capital flows to an analysis of the impact of sustainability for investors at the city, building, financing and corporate level.
As sustainability becomes increasingly important across real estate, it is important for readers of The Wealth Report to understand what this means for them and their investments. With 63% of respondents to The Wealth Report’s Attitudes Survey saying their clients don’t feel that they have the information required to properly assess ESG-related property investments this starts to bridge that information gap.
What are the main findings of the report?
Next year is predicted to be a record year for global cross-border real estate volumes and for UHNWIs, we forecast there will be a resurgence of interest in the office sector, particularly targeting the US and UK.
In terms of sustainability, at the city level, we have created an index of the world’s most sustainable cities for real estate, and when looking exclusively at the green element of the index, London, Shanghai, New York, Paris, and Washington DC hold the top five places. At the building level, we have found that green certifications in both the northern and southern hemispheres of the world can lead to an 8-18% sales price premium, with the highest green ratings commanding the highest premium.
Overall, our research finds that as we look out over our forecast period, we predict both a more active and a more responsible global real estate investment market: one in which leading decision makers will balance the imperatives of sustainability with the ambitions of growth.
What did you find most interesting or surprising when you were pulling together the report?
There are so many interesting insights, which I would encourage readers of The Wealth Report to explore in more detail. We have used advanced modelling techniques which forecast a predict a ‘roaring 20s’ bounce in real estate activity next year, which could provide a real opportunity for private investors. Assuming a five-year hold, transaction activity in 2017 helps indicate the level of asset rotation we might see in 2022. Global volumes in 2017 were circa 11% above the long-term average. Given that some assets purchased in 2016 and earlier are also likely to have been held back from sale through the pandemic, asset rotation could be a significant contributor to assets coming to the market in 2022.This is forecast to be met by robust cross-border demand, including for the office sector which could contribute more than half of overall cross-border volumes transacted in 2022.
Can you tell us a bit more about a green premium for sustainable buildings?
Using hedonic price modelling, we have been able to identify the different building, lease, time, and locational factors that contribute to sales prices for prime office buildings in London, Sydney, and Melbourne. By using this methodology, we have been able to identify the contribution to sales price that is uniquely generated by a building’s green rating.
We found that prime Central London office buildings with a BREEAM Excellent rating enjoy a 10.5% premium on sales price compared to equivalent unrated buildings, while those with a BREEAM Very Good rating enjoy a 10.1% premium. BREEAM is a leading sustainability assessment method for masterplanning projects, infrastructure and buildings.
In addition, prime office buildings in Melbourne and Sydney with a rating of 5+ enjoy a 17.9% premium on sales price compared to equivalent unrated buildings, while those with a lower National Australian Built Environment Rating System (NABERS) rating enjoy an 8.3% premium.
Finding positive results for office markets at opposite ends of the world indicates that demand for green buildings is an international phenomenon and one that is likely to grow in significance. It also corresponds to our findings that BREEAM ratings also contribute to a rental premium for prime Central London office buildings.
How do I find out more?
The summary, on demand webinar, report and interactive capital flows can be found at: www.knightfrank.com/active-capital. We will be adding more global research to the website throughout the coming year, so do visit regularly and get in touch with any questions.