TS: There’s been talk of an exodus from cities, but my feeling is our megacities will still be the most attractive places for the majority of employers to build office space. When I talk to people in early middle age or older, they’re more comfortable working from home, and not so bothered about going into the city. But people who are 25 to 35 – a core age range for employers – typically want to be in on the action. It’s important we don’t project our own preferences on to the situation, and reflect the fact that younger people still want to live and work in city centres.
Economy & Finance
TS: The role and skill sets of investors are changing. Going back to before the global financial crisis, as a retail investor you might put your money in and employ a managing agent to make sure rent reviews are done and rent collected. What we’re seeing now is the owner might manage that serviced office or use an operator under a management contract. The investor is exposed to the operational performance of the asset. It’s no longer enough to passively collect the rent each quarter and expect to increase it at the next review. You need to manage more proactively and provide the tenant with a service that they value.
PH: And those investors who don’t evolve could feel the full pain of the market.
TS: Many are investing in distribution warehouses at the moment, because you typically get new assets with long income. It’s a hot sector. But this asset might become obsolete over time and will need managing. The underlying demand growth is still massive, but every cycle will get to the point where supply starts to overtake demand. That will happen in logistics.
Health & Meaning
PH: The industry has started to take sustainability seriously and it’s exciting to be part of this. While we haven’t got all the answers to reducing emissions, sustainability is a long way up the agenda, if not the first thing on it. As a lender, we have targets about how we become carbon neutral in the next 10 or 15 years. In the residential sector, for example, we only fund developments with EPC (Energy Performance Certificate) ratings A and B.
TS: Assets that are sustainable will be worth more in future. It makes sense to accept more risk on day one to support these projects, because the return will be better going forward.
PH: It’s like the motor industry: in 20 years it doesn’t matter how much you paid for your diesel car, it won’t be very valuable.
Megatrends: five essentials for the real estate sector
There are opportunities for the leisure sector if local governments buy retail premises for redevelopment, but their commercial viability may be limited.
Office space may decline by 10% to 15%, and the way that businesses occupy that space is also changing.
There will continue to be young, affluent buyers in urban areas for residential properties, with a focus on quality.
Investment in real estate will increasingly demand hands-on management: this means providing shorter, more flexible leases and, in some cases, returns linked to the underlying performance of the asset.
Tenants and planners prefer sustainable developments – a two-pronged incentive for developers to build back green after the crisis.