Over the past two years, the world of real estate has at times felt like a theme park ride with huge highs of confidence followed by sweeping lows as Covid-19 restrictions or supply chain issues hit home. Take logistics and offices for example: each experienced the pandemic differently, but investors in the capital and across the UK stay willing to pay a significant premium for the top stock in both.
While it’s hardly a ‘hot take’ to say that logistics is doing well, institutions have previously targeted completed assets, preferably fully let on a decent covenant, and fund managers have been wary of taking on too much development risk. Now, funds are investing earlier in the construction – or even planning – phase, seeking to capitalise on healthy demand and beat their peers to the party. Forward funding and joint venture structures continue to be increasingly common, as capital and developers work together to meet occupiers’ needs and expectations, which are high in terms of size, spec and sophistication as consumers grow more impatient.
Traditionally more glamorous than windowless warehouses, offices have long been seen as a steady source of rental income, however the mass experiment of home working necessitated by the pandemic has indicated that – by some measures at least – productivity does not suffer if employees stay away from the office. The qualitative effects on businesses are less equivocal: from individual mental health to socialising new joiners into a shared corporate culture. However, as employers continue to tempt staff back into the office, they need to offer more than a desk and an Anglepoise.
This is especially true for London, with The City at its heart. If developers and landlords are to persuade tenants to stay, they need to offer top quality space and at the right price. As with logistics, the premium end of the market is hot and there is a dearth of top-quality stock, particularly in central London, where investors and developers – both UK and overseas – continue to set their sights.
During the pandemic, we’ve witnessed a major structural change in UK commercial leasing. Flexible office providers remain popular, and we’re seeing more and more traditional landlords coming to terms with the fact that tenants require increasingly flexible leasing terms. Built in flexibility via tenant break rights is in favour and, in the retail space, landlords and tenants are looking more and more towards turnover rents as a means of creating a more balanced approach to rental liability.
With Covid-19 and Brexit not the only engines of change, the labyrinth of ESG-focused legislation and policies are steering the real estate sector towards ‘ever greener’ investments, pushing the boundaries for ESG integration and shaping the asset class.
Navigating a mixture of growing legislative and policy developments, such as Minimum Efficiency Standards, the Global Real Estate Sustainability Benchmark, climate disclosures and green rating systems, investors and lenders continue to analyse the credentials of their investments through an ESG lens with the availability and quality of ESG-related disclosures becoming all the time more critical to their decision making.
Other hoops for foreign and domestic investors to jump through include the introduction of the UK’s National Security and Investment Act regime, which came into force on 4 January 2022 to overhaul the UK’s approach to investment screening, and the new register of overseas beneficial owners of UK property, a fast-tracked proposal within the Economic Crime (Transparency and Enforcement) Act, prompted by the Russia/Ukraine crisis and expected to come into force later this summer.
While 2021 was for many the year in which the real estate market found its confidence again, it’s obvious that 2022 won’t stay on exactly the same tracks, not least because the legal landscape is changing, and this forms the backdrop to transactional activity. However, the market is in the upturn phase of the property cycle, with London remaining an attractive and diverse location for local and foreign investment.
Building London Summit
We are delighted to welcome Andy Bruce as a guest speaker at our Building London Summit. For more information and to book tickets visit our events page.