2020-an imminent financial crash or will the real estate sector’s fortunes continue to be favourable?

On 25 February, Bisnow hosted a panel discussion on the prospects for UK real estate in 2020. The eminent panel included representatives from Hines, M&G Real Estate, Moorfield Group, Patron Capital Partners and Schroder Real Estate. Here are some key takeaways.

Forecast

• Bearish forecast – In light of the long-term bull market that we are experiencing and the inflated property prices, the general feeling was that there is potential for a big correction to the market in the near future. The possibility of an imminent financial crash is a concern for investors who continue to invest but are being cautious and deploying capital on a risk-adjusted basis. Could the coronavirus be the black swan event which derails the market? This is yet to be seen but the stock markets are already starting to react negatively. It was clear, however, that the panellists weren’t expecting any Brexit-triggered corrections, although some did feel that we have not seen the full extent of Brexit’s impact on the regions where they anticipate some tough years ahead.
• Tight supply of quality stock – The availability of prime investment stock will remain tight and vacancy rates low despite strong demand from investors. The high competition for prime stock has resulted in many sellers seeking premiums for their properties. This trend will continue as the shortage of debt available for speculative schemes and the high cost of debt finance will continue to restrict speculative development. Many lenders remain unwilling to take the risk associated with speculative development despite the strong occupier market, and so it was felt that there is a need for more creative lenders and more capital which is available to lend in a flexible way in order to meet the demand.
• Overseas investors – Whilst some of the panellists thought that overseas investors were scaling back their activity in London and that the Brexit decision has made the UK look more insular and less attractive to overseas investors, others felt, despite the fearfulness surrounding the economy and Brexit, that London will continue to benefit from continued investment from overseas (and Asia in particular) as a result of the weakened pound. They thought that international investors still saw UK commercial real estate as a good home for their capital, and that this would continue through 2020. Many overseas investors deploy a gateway strategy and London will maintain its position as one of the key gateway cities where overseas investors feel comfortable investing.

Trends expected to emerge

• Impact investment and ESG moving into the mainstream – With the built environment contributing to around 40% of the UK’s carbon emissions, and mounting social and regulatory pressure to tackle climate change perhaps as a result of the “Greta effect”, the hot topic of sustainability will dominate 2020. ESG will be a key commercial driver over the next few years as investors seek a social dividend as well as a financial dividend. Investors and trustees are taking ESG more seriously and, as a result, fund managers are increasingly having to report on “social” criteria. Charlotte Jacques, Head of Sustainability and Impact Investment at Schroder Real Estate, noted that one charity managed by Schroder now has a policy not to invest with companies which do not have ESG initiatives.
  
  Equally, occupiers are taking a greater interest in the impact real estate can have on the environment; there is evidence that occupiers are willing to pay more for ethical and efficient buildings, and there are tenants with strong covenant strength who will only occupy buildings with “outstanding” BREEAM performance. In 2020, it seems we are likely to see more building, buying and repositioning of assets to make buildings fit for the future.
• PropTech needed to address sustainability issues – Sustainability is a difficult concept to define. There is a desire within the built environment to “do good” but how do we deliver and measure that? New emerging technologies will help investors and occupiers understand and analyse the sustainability and performance of buildings.
• Flexible workspace evolution – The trend for flexible office and co-working space will continue to dominate the office market in cities like London with a diverse occupier base (including a large number of start-ups, SMEs and freelancers) which is increasingly seeking shorter leases, well-designed and well-apportioned space, more amenities and services, and immediate connectivity. Traditional landlords will increasingly deliver their own flexible office product to meet the demand for flexibility and service. We have already seen British Land launch its own flexible workspace brand, Storey, and L&G launch Capsule. The challenge for traditional landlords moving into the flexible office space will be the service and hospitality element as in order to operate a successful business, they’ll have to do more than merely provide a space and collect rent.
• Retail still in decline but logistics/industrial sector on the up – The retail sector will continue to face turmoil through 2020, with panellists arguing that some large shopping centres are beyond repair and should be knocked down and repurposed to industrial or residential schemes. Conversely, and as a consequence of the growth of online shopping which has forced many traditional retailers into administration, the logistics and industrial sector will continue to see strong growth.

Holly is an Associate in our Commercial Real Estate team.