The traditional notion of real estate investment is outdated. Gone are the days of illiquid and clunky, low-yield capital allocation concentrated into a single property. As the nature of living is remodelled through changes to how we live, play and work, the new wave of purpose-built private real estate funds or private market transactions are addressing the fundamental concerns and misconceptions that many investors have, particularly within the private banking and wealth management industry.

We only need to look at other similar asset classes to understand why purpose-built accommodation is starting to gain some recognition as a popular investment vehicle. Retail and office real estate is still struggling in many parts of the world and industrial real estate is a mixed bag, entirely dependent on the sector it is anchored to. As living culture continues to change, it is also time to look at residential real estate investment beyond low yield, single investment homes seeking speculative capital. The new answer for investment may lie in purpose-built real estate assets.

Modernized living experience

Over the past ten years, there has been a fundamental shift in how people live, and how homes are designed. Real estate, which was previously seen as a commodity investment asset class, primarily dependent on physical bricks and mortar, has now morphed into a community-based asset that often transcends the physical product.

Designed to meet more than the basic function of living accommodation, purpose-built real estate is suitably curated for specific audiences: from students, co-living and multi-family housing to senior living.

Take co-living for example. Doing away with the extra costs and headaches associated with renting an entire property and gaining immediate access to like-minded social circles makes co-living an attractive option for young professionals in traditionally expensive cities. Not to mention, co-living gives a purpose-built solution that meets the unique needs of many renters and is up to 30% cheaper than traditional accommodation options.

Co-living is still evolving as an asset, but according to Cushman Wakefield , there is a current inventory of nearly 8,000 institutionally operated beds in the US alone. This is soon to be followed by the significant pipeline of roughly 54,000 beds, which are in various stages of evaluation and development.

With purpose-built student accommodation ( PBSA ), students can now decide on more flexible tenancy lengths, have access to better add-ons – like faster internet speed – and ultimately live in a safe, community-focused environment designed to optimize their educational journey.

These touchpoints are part of the reason for its success, with UK PBSA occupancies for 2021/22 at levels undiminished by Covid-19. The UK PBSA sector is now worth around S$110 billion ( US$81.76 billion ), with UCAS application data from 2021 showing an 8.4% annual increase in university applications. These trends indicate that the sector will continue to grow, with PBSA posturing to become one of the most resilient and attractive institutional-grade investment vehicles for private banks and high net worth investors.

These changes, both to how we view accommodation and to how housing products are curated and invested in, have created an opening to make purpose-built real estate a viable asset class for investment in the private markets.

Real asset real estate

It is natural for investors to allocate a portion of their portfolio into alternative investments in the private markets to diversify from the public markets. It is generally accepted that investing in the private markets may naturally bring about its own set of risks, including reduced liquidity and asset diversification.

The benefit of the purpose-built residential sector is a clear reposition away from public market risks. Purpose-built residential assets are asset-backed and proven to be resilient across all markets. At the same time, these sectors have been proven to negate some of the private market concerns of liquidity and diversification because of the high level of transactions, portfolio capital market liquidity and access to real assets via bite-sized investments

Because of the growing popularity of the asset class, both due to certainty of returns and recognizability as a quality option in the private markets, institutional interest has been piqued – and for good reason. For example, QIP has delivered annual returns of around 13-20% for our purpose-built real estate assets, dependant on the specific project. These numbers are fairly consistent with market trends.

With such attractive investment prospects, money has already begun to flow into purpose-built real estate – a sector that has been previously underweight in many investment houses.

Beat the rush

As in-the-know institutional investors begin to look at the space more closely, the onus is placed on the providers of these assets to set up and demonstrate the proven blueprints of this sort of asset vehicle, marketed to the correct stakeholders within the institutional investment space. This sort of activity will continue to invigorate the market, creating new and even better opportunities for interested parties.

Those with negligible experience in investing in the private markets need to educate themselves. Fast. Sophisticated private clients that have experience with real estate are already abreast of these trends and are working with suitable broker channels and partnering directly with niche providers to invest.  We have also seen some private banks are setting up dedicated arms to search for this sort of opportunity.

Private banks and wealth managers must work quickly to get up to speed with the changing world of real estate investment. They need to work with niche providers, such as those in the purpose-built living asset space, to make institutional-grade real estate investment opportunities available to private wealth clients – or be at risk of losing out to those that do.

Peter Young is a co-founder and chief executive officer of QIP.