by Alexander Peace with quotes from Charles Ferguson Davie
As the UK continues its energy transition, it will need a massive amount of energy storage capacity
Before the financial crisis, commercial real estate meant offices, shops and industrial.
But as the market turned, so did investment strategies, and since 2007 alternatives – build-to-rent, student, storage, hotels – have grown grew exponentially. According to the IPF, the “other” segment of the commercial property market has doubled in size, from £50bn to £100bn.
Many of those early stage investors relied on the now infamous “structural drivers of demand” to underpin their strategies, but key to success was also being able to institutionalise assets to secure interest in the sector.
That institutional interest in new markets has not gone away, but now, with BTR yields at around 4%, logistics saturated and worries emerging around the student sector, investors are searching for the next alternatives.
So what’s on the cards, and which could be the next big thing?
Buy to let
It’s a bit of a curveball, but there are some funny numbers that back it up. A CBRE note from 2023 estimated that 400,000 BTL landlords had left the sector since 2016. Against that, there have been roughly 123,000 BTR and SFR homes added.
So what’s happening to all that BTL stock?
Clearly most is going back to the for-sale market. But some is also being picked up by institutional investors, looking to quickly build pepper-potted portfolios of stock around the country. Moorfield is doing it – and has already deployed over more than £100m. So is Immo.
Charles Ferguson-Davie, co-chief executive officer at Moorfield, says it was the group’s experience in BTR, SFR and retirement that pushed it into BTL.
“We believe this more granular approach can achieve greater scale in time, as there is so much more to buy around the country. And it’s a far bigger sector than the new build or apartment sectors,” he says.
Moorfield is clustering its focus to ensure management efficiencies, not to mention using technology to create better procedure. In the end, the final product could look a lot more like the SFR sector in the US, which was built out of buying existing homes.
“More investors want to get into residential for rent,” says Ferguson-Davie. “It started with multi-family, then SFR. It’s a matter of time before that leads into more residential for rent opportunities that also includes the older more granular stock, as long as its very good quality and in the right locations.”
BNG funds
Many developers will complain about the now mandatory BNG offsetting requirements – but the requirement for developers to give back 10% more habitat than their schemes take away has the potential to create an entirely new investment class.
Under the system, if you can’t do your offsetting on site, you need to use offsetting funds to replace the habitat you are losing.
For the moment, the market is relatively nascent – probably around £300m – but that’s not stopped a number of funds being set up to take advantage of its growth, including Wild Capital, which launched with backing from Nyera at the end of 2023, and Gresham House, which launched a $380m raise in mid-2024.
While the sector is at risk from government intervention, the investment rationale is pretty solid: literally turning a profit from fields, while there has already been a preference for the more institutionalised vendors of offsetting.
Battery storage
There’s a lot of buzz about renewables, and wind and solar farms are an asset class in their own right. But renewable energy often produces power when you don’t need it.
The solution to iron out the peaks and troughs is battery storage.
At base, it is buying and storing electricity when it’s cheap, then selling it back when it’s expensive, though there are also slightly more nuanced – not to mention institutionalised – ways to provide said electricity. Fees and contracts can be arranged to stabilise revenues, and last year the first two-year “tolling” contract agreed between Gresham House and Octopus Energy, which provides a guaranteed revenue return for its fund.
Unfortunately, the sector is vulnerable to changes in energy prices – and low gas prices in Q1 2024 led to the lowest income on record for the sector, according to Modo Energy. But as the UK continues its energy transition, it will need a massive amount of energy storage capacity – at least 24GW, according to Rystad Energy. To put that into context: the UK’s largest energy storage plant, Lakeside Energy Plant, stores about 100MW.
Social infrastructure
Social infrastructure means the property assets that enable education, healthcare, waste, transport and storage. They’re complicated, often grubby, and come with all sorts of additional difficulties, but they also come with government backing,
Hugo Llewelyn, CEO at Newcore, says since it launched its “new core “sectors fund post 2010 – which invests in residential, storage and social infrastructure – it has delivered 10% a year on everything invested in, from inception, with virtually no gearing.
“These are properties enabling essential services, so the tenants pay their rent through thick and thin,” he says.
“But there’s a lot of positive social impact you can have too: for instance, building a school where there wasn’t one before, or repurposing clinical healthcare at affordable levels.”
The outlook for social infrastructure is also promising, with the government trying to ramp up private sector investment to build the next round of services in the UK – with the newly pooled pension funds been given a particular mandate, not to mention a need to take existing assets through the net zero journey.
That investment will need a conduit.
Llewelyn says: “Obviously social infrastructure is quite a technical area to invest in, so you need to know your markets, tenants and your food groups, but there’s a lot of potential for growth, as a conduit is needed for investment, between institutional capital and the underlying essential service providers.”
Powered land
As builders know, it is no joke getting connected to the grid, and while the government is aware of the problem, it is not one that is going to go away quickly.
So the opportunity, according to ActivumSG, is powered land.
“Everyone knows about the explosion of AI and the power requirements for data centres, but the utility companies are notoriously slow in developing power connections,” says Brian Betel, global head of direct assets at Activum SG.
“So, the play here is to look for land, get the power contracts, the cables in place with the substations, then sell it onto the end-users – a bit like selling land with planning permission to housebuilders.”
ActivumSG is doing this around Europe, and currently only for data centres. In October last year its Spanish team sold a 240,000 powered plot to Damac for a €400m data centre.
Betel says for the moment the firm is focused on targeting industrial sites that can be repurposed back into logistics schemes if need be, and it has received institutional interest for this type of strategy. ActivumSG is exploring a bespoke powered land vehicle, alongside its flagship opportunistic fund.
“Despite the recent DeepSeek news, we believe that, by focusing on the right locations, this is something that can continue to grow as a medium to longer term trend, given demand is outstripping supply and the tremendous need for power,” says Betel. “As competition heats up, there will be increasing need for specialists to secure power.”
Affordable housing
Affordable housing is a sector that has already been institutionalised in its own right. But Blackstone’s sale of 3,000 shared ownership homes to USS at the end of last year showed the massive changes being made by the “for profit” providers, and their potential for delivery.
There’s already a host of big names in the sector, including CBRE IM, M&G and L&G, but the government’s target of half a million homes over the course of this parliament means there is room for plenty of more.
The issue is establishing new routes to building. Sage hoovered up Section 106s around the country that were being sold on by housebuilders, but this relies on the private market being in full swing. Other models use grants to build out developments from scratch – such as CBRE IM at Abbey Wood, or London Square in Kingston. It is these deals the government will be trying to emulate, but which are far harder to put together.
Open and cold storage
Everyone loves storage, but with logistics and self-storage becoming increasingly pricey, investors are looking at other plays to take advantage of our desire to store stuff.
For those in the know, industrial open storage (IOS) is the new hot ticket, with a potential £16bn UK market to exploit that has attracted early movers including Centerbridge Partners.
Ideal sites are highly versatile and be used for multiple industry sectors, including e-commerce, infrastructure, automotive, construction and logistics businesses – which spreads risk – while their locations often means there is alternative use potential.
Cold storage requires substantial operational expertise – and cold weather – but ties into the UK’s ongoing focus on nearshoring. Business models rent palate space to users for a period of time, but the higher costs – not to mention perishability of produce – means loading, storing and unloading has to be a seamless process.
Sub-£10m regional offices
Not one for the faint-hearted, but one that rests on a belief in the future of the workplace in the UK.
Office prices outside of London have fallen by anywhere between 30% and 60%. In the meantime, due to ongoing issues with viability, new supply has all but dried up. But despite the working from home agenda, we do still need offices.
One core investor said if he had £1bn, he would invest in decent regional offices priced at around £9m. Then, when the office market bounces back and values increase, without doing anything, those offices would push back into the institutional price bracket.
He was being slightly facetious, but he’s not the only investor to point out that office values are rock bottom. Steve Morgan, the ex-Redrow CEO, underwrote Regional REIT’s £110m capital raise last year, through his Bridgemere Investment vehicle.
For the right offices and with enough capex to make them ESG compliant, there’s some very cheap and interesting opportunities out in the regions, and worst case scenario (and like Steve Morgan) you could always convert them to residential.
https://greenstreetnews.com/article/alternative-angle-what-is-the-next-10bn-sector/