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The old and the new WORDS – VICTORIA ORMOND
We look at two property sectors, one long established and one fast emerging, to discover how they are being influenced by the global Covid-19 pandemic and what the angles are for private investors
The office sector remains a popular investment choice for now
The old… Offices The office sector has traditionally been a stalwart of global real estate investment. Indeed, in the last full year pre-pandemic, around 35% of total real estate investment globally was channelled into office buildings. Although the enforced surge in working from home has led some to call time on the office, Knight Frank believes that the sector will continue to play a prominent role in global real estate portfolio allocations. Structural changes were already under way in the office occupier market before Covid-19 and the virus will only accelerate these, altering the form and function of the office of the future and patterns of investment. Despite the pandemic, the office sector remains a popular investment choice for now, still contributing around 35% of global real estate investment volumes in 2020, based on provisional data from RCA. To understand how the global allocation of the office sector could shift in the future, as part of our Active Capital research we used an augmented Black Litterman model to predict how private equity – a leading
indicator of future market trends – allocations to the office might change. Our research suggested that the office sector could rebalance to around 21% of private equity global holdings from 39% by the late 2020s, with an increase in logistics and non-traditional sectors such as the private rental sector. While the proportion of private equity allocated to the office sector may reduce, pointing to a possible reduction in
allocations by other investors, our analysis also suggests the overall size of the private equity sector is likely to increase, cushioning any reduction. Despite the rebalancing, the office sector looks set to remain a significant allocation for private investors, particularly those looking for income-producing assets in locations where innovation is helping to underpin and support the real estate sector by generating wealth and attracting talent.
