MAJOR INDUSTRY SURVEY REVEALS IMPACT OF COVID-19 ON UK REAL ESTATE AND OPPORTUNITIES FOR AN ESG-LED RESET PROMPTED BY INVESTORS AND OCCUPIERS

• ESG and social purpose take centre stage for global investors as real estate sector responds to the pandemic
• Despite short term concerns for offices, some assets have grown in appeal to investors, with Industrial & Logistics and Healthcare the stand-out sectors
• Offices remain central to occupiers who say a blend of home and office working will be best for productivity (45%), creativity and innovation (46%), and motivation of employees (47%).
• 82% of occupiers say offices will continue to be a hub for human connection in some form and 61% saying they will refurnish offices when people return to work – floorplates won’t change, floor plans may
• But real estate looks resilient with only 42% of industry leaders saying they are pessimistic about the outlook for the market, much less negative than after the Brexit vote when 64% were downbeat

A major industry survey of senior real estate leaders, corporate office occupiers and global institutional investors has revealed the impact of Covid-19 on UK real estate and priorities for the sector as it moves beyond the pandemic. ESG and social purpose look set to take centre stage at a time when real estate is in the headlines as we emerge from lockdown.

Leading international law firm CMS has today (Friday 18 September) published its findings from an extensive piece of industry research in a report entitled “Real Estate Re-set: offices and purpose beyond the pandemic”.  This is the eighth year CMS has produced its annual real estate report, which acts as a barometer for the industry and an outlook for the market, while focusing on a key topic.  

In addition to gauging high-level perspective from industry leaders, occupiers and investors, this year’s report also highlights ESG (Environmental, Social and Corporate Governance) as a fundamental subject which is having a transformative effect on the both the principles and mechanics of real estate. 

The quantitative survey took place in July 2020 and was conducted by FTI Consulting on behalf of CMS, gauged and weighted the opinions of over 1,500 occupiers across the UK, Europe and Asia, including large, SME and micro organisations.  Across the real estate industry, the poll garnered the opinions of circa 250 real estate professionals, while in the investor community, opinions were taken on board from over 520 global institutional investors across Europe, North and South America, Asia Pacific, the Middle East and Africa.     

The report also incorporates a unique series of one-to-one industry with business leaders from some of the leading companies in real estate, including British Land, Hines, WeWork and Morgan Stanley. 

The key findings of the report according to subject have been highlighted below, and a full copy of the report can be made available on request:

UK real estate market outlook

• 42% of industry leaders say they are pessimistic about the outlook for the UK real estate market (with 34% neutral), compared with 31% in 2019 and 24% in 2018.  
• However, to put in context with the impact of major events on industry sentiment, following the outcome of the Brexit referendum in 2016, 63% of respondents to the same question said they were pessimistic about the outlook for the UK real estate market.
• The opinion of fair value in London property has increased for the second year running, with 41% believing the London real estate market to be fairly valued(5% more than 2019 and 13% more than 2018), with a premium placed on high quality, strategically located developments with maximum wellness amenities for employees.  
• 55% of respondents believe the London real estate market to be overvalued, with just 4% expressing it to be undervalued. 
• The appeal of Offices as an asset class has dropped sharply, with 33% of respondents saying the sector is appealing, compared with 60% in 2016.
• Other sectors whose appeal has dropped significantly in this year’s report are Hotels and Leisure (47% in 2016 compared to just 9% this year); Student Housing (51% in 2016 compared to 24% this year); and Retail (35% in 2016 to just 3% this year).
• However, some assets continue to grow in appeal to investors.  Distribution and logistics continue to go from strength to strength with 84% describing the asset class as appealing, compared with 64% in 2016.
• Other sectors demonstrating a considerable growth in appeal include Healthcare (44% in 2016 to 71% this year; and Residential (46% in 2016 to 62% this year).  The Retirement Living sector, which while not recorded until 2018, also posted a strong appeal rating of 62%.
• Western Europe has seen a big jump of in anticipated Foreign Direct Investment in UK real estate over the next two years, with 22% of industry experts anticipating an increase.  This is likely due to limitations on long distance travel from 2020, triggering falls in anticipated investment from the Far East and Middle East. 
• The occupier demand picture is dominated by Healthcare, with 55% of industry experts seeing a rise in the next two years compared with 32% in 2016.  Distribution and Logistics is the only other sector which respondents envisaged an increase in demand, with all other sectors, including Technology, forecasting a decrease.
• Offices remain central to occupiers saying a blend of home and office working will be best for productivity (45%), creativity and innovation (46%), and motivation of employees (47%). 
• With regards the return to the office, interestingly 61% of occupiers said they would be refurnishing their offices when employees return to the workplace, suggesting that in the mid-long term offices will continue to endure and thrive, albeit in a different form and configuration as a place to meet, exchange ideas and enable closer personal interaction alongside more agile workforces. 

Environmental, Social and Corporate Governance

• In a post-Covid-19 world, 92% of investors said they will invest more into companies which have a strong ESG strategy.
• Global institutional investors are setting the pace on the ESG agenda, with 99% articulating a corporate social purpose, with the real estate industry and Occupiers not as advanced at 79% and 76% respectively.
• 62% of occupiers say corporate social purpose has become more important post-Covid-19 than pre-Covid-19.
• 65% of global occupiers would take a pay cut to work in a sustainable building.
• On average Occupiers and Investors believe that having a social purpose to help guide decisions and actions can add 29% and 30% respectively to the overall corporate value of a company.
• Occupiers and the Industry generally rate positively their company’s approach to ESG, with employee well-being, environmental performance and social contribution highlighted as particular areas of strength.

Ciaran Carvalho, Partner and Head of Real Estate at CMS, said:

“Even before the pandemic, the real estate industry was embarking on a period of seismic change.  The transforming environmental, political and social landscape and rapid advances in technology were changing the way we build, where we build and our relationship with where we live, work and spend our leisure time.  

“The pandemic has accelerated many of these trends, while magnifying the issues and bringing into focus the opportunities the industry faces.  This report is published at a critical time for real estate, with the industry at a crossroads. It is front and centre of the national agenda with the emergence from lockdown and the reopening of our offices, shops, schools, cafes, restaurants and leisure facilities.

“While the findings from our survey on the immediate prospects for some UK real estate asset classes are challenging, the resilience, innovation and commitment from our industry leaders to tackle climate change, diversity and inclusion and wellbeing is truly inspiring.  

“Far from a burying the head in the sand approach and being overwhelmed by the short-term commercial reality of the ‘new world’, our pioneering companies are demonstrating a real social purpose, focusing on long-term, innovative yet pragmatic solutions to building our communities of the future.” 

CMS’s Real Estate Reset report can be found here.