Publication
06 Jun 2023 ·
United Kingdom
Asset classes
6 min read
UK professionals: How appealing are following asset classes?
The private rented sector (PRS) has come out on top this year, inching ahead of residential, which topped last year’s table. Student housing has recovered from its dive in the early days of the pandemic to secure its highest ever score this year.
For CMS partner Tanya Francis, these results highlight the strength of living asset classes generally. “The demand across the sector continues to outstrip supply, which naturally feeds into the appeal of the living asset classes to developers and investors. Seemingly, even in an economy struggling with a ‘cost of living crisis’, many occupiers still prioritise high-quality accommodation in the right location and with the right amenities.
“This is coming through across the whole of the living sector, from student accommodation to senior living, with standards increasing across the board and our clients report strong sales, lettings and high occupancy levels.”
Appeal over time: PRS, residential and student housing
Appeal over time: distribution/logistics, healthcare and senior living
Distribution and logistics, healthcare and senior living all show a slight downward trend while remaining strong. So does life sciences, a recent addition to our poll. Their underlying strength is not surprising, as all are positioned to benefit from secular demographic trends; their current mild slide may partly reflect the fading of various pandemic-related boosts.
Appeal over time: industrial, hotels/leisure, office and retail
Hotels and leisure properties have been on a rollercoaster ride. Badly hit by covid, which saw them plunge to a point near the bottom of our table, they now look to have recovered and stabilised, this year achieving their best ever score in our survey – ahead of data centres, another new addition, and only narrowly behind the much more historically successful industrial.
By contrast, last year’s office popularity seems to have been a blip – possibly reflecting a rush of enthusiasm at the first signs of a post-pandemic return to the workplace. Office appeal is now back in its pre-covid ballpark.
Retail has been propping up the bottom of our survey since 2016. But while it still ranks last, it has recorded its second strongest appeal in eight years, after 2022’s record high. Factors include a partial return to the high street and the mall, with online shopping levels rebalancing as covid eased.
Global asset classes
The global ranking of asset classes looks significantly different from our UK ranking – a reminder of how diverse the world’s real estate markets can be.
Global investors: how appealing are the following asset classes?
Seen from a global perspective, every real estate asset class appeals to a significant majority of investors. Differences in levels of sentiment appear less substantial across a broad international canvas than they do locally.
One thing both our global and UK data show is a relative lack of enthusiasm for offices. They topped our global ranking in 2020, when fully 50% of investors found them “very attractive”. But now only 30% see them that way.
This is clearly connected with the rise of hybrid working: 90% of global investors believe the lives of office workers are now a blend of centralised offices and remote working, with 85% agreeing that office workers spend more time working at home than they did five years ago.
The implications of this change will take time fully to unfold. There are already indications that we are seeing the evolution of the ‘destination office’: a high-end property that is as much a social hub and learning and ideas centre as it is a traditional workplace. And at the other extreme, as discussed below, we are seeing a marked growth in the number of old office buildings being repurposed.
Changing places
In 2022 we found that almost a third of industry respondents planned to repurpose retail to housing, while a quarter were aiming to convert offices to housing. This year, there are signs that the trend is growing.
While out-of-town retail is doing relatively well in traditional terms, some of the demand for retail in towns and cities – especially for secondary properties – appears to reflect its potential to be repurposed for residential and other uses.
Earlier this year, research from trade body Revo and Lambert Smith Hampton suggested that up to 40% of high street shops would need to be repurposed over the next five years, as demand for that type of retail slows.
Another recent report, from CBRE, also suggests that a significant number of central London secondary office deals are now being undertaken by buyers who see an opportunity to convert the properties for new uses.
Offices whose prospects may have been increasingly uncertain in the new era of hybrid working are being reborn as hotels, student housing and apartments.
Such projects are not without risk – including planning issues, and the need to comply with tougher environmental regulations – but offer hope for buildings that might otherwise be in danger of becoming stranded assets.
In the bigger picture, they also offer hope for urban regeneration, and creative solutions to some of the problems that afflict many town and city centres.
Tenant failure
How has the frequency of tenant failure in your portfolio changed in the past 12 months?
The vast majority (93%) of global investors are concerned by tenant weakness, with 47% very concerned.
This correlates with the fact that, as our chart shows, over half (55%) have seen an increase in tenant failure in the last year. Numbers are particularly high in Asia Pacific, where nearly three‑quarters of investors (73%) have seen an increase.
According to CMS partner Danielle Drummond- Brassington: “In times of economic uncertainty it is inevitable that we see tenant failures or tenants seeking to restructure deals to alleviate some of the financial pressure they are under. The increase in tenant failures that were expected post pandemic has been delayed, and is only now really ramping up as the withdrawal of government financial support bites.”
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