London’s real estate investment outlook

Instinctif Partners’ Real Estate and Construction team attended Bisnow’s London investment agenda 2020 conference at the end of February. With upwards of 200 attendees from right across the commercial property arena, and an impressive range of panellists, it provided a useful temperature check and helped set the scene for the rest of 2020. This blog summarises some of the key insights gained from the half-day spent at Le Meridien Piccadilly.

Investment in offices: no let-up in investment demand

The way we all work is changing with more frequent working from home, and other locations, to balance demands from our personal life. When in the office, employees’ expectations are higher than ever before that the space will be carefully curated to maximise well-being, as well as productivity, and with a mix of spaces to facilitate collaboration. The panel acknowledged that the way people occupy office space is changing, but demand for square footage in central London will not abate. Of course, there are new breeds of office space emerging, offering flexible options for businesses of all shapes and sizes. The latest large commercial operator to capture this opportunity is Cushman & Wakefield which has recently launched Indego, a white label service for office landlords and investors looking to create bespoke flexible workspaces in the UK.

The future is bright for the office sector as it continues to attract investment, particularly from Asia. The panel also touched on residential development in London, which has seen an explosion in build to rent, with the capital flow here forecast to grow considerably.

Investment in retail space in the Capital is still sticky however and is seen as riskier than other asset classes. Whilst our changing attitudes and behaviours have caused operators and landlords of office space to alter their offering successfully, consumers’ increased preference for online shopping has superseded the bricks and mortar store, and many retailers have been slow to catch up and pivot their offering. Prime streets in Barcelona were offered as an example of the high street retail model operating at its best, with unique specialist stores (such as a haberdashers) alongside other destinations such as beautiful beaches; the visit is worth making if you know you will find what you are looking for and can engage in other leisure activities as part of the same trip. In London, and more widely across the UK, that unique experiential mix is less developed as a concept – our decidedly non-Mediterranean climate is only one part of the problem.

Measuring the “S” in ESG

The panel discussion I was most interested in hearing before I arrived was on ESG. The acronym stands for Environmental, Social and Governance, and is widely reported as being of increasing importance to investors, especially younger investors.

The “G” should be a core part of any well-run business and if appropriate governance is not in place any respectable organisation should have a plan in place to fix this. The ‘E’ was something the panel felt businesses are making strides in and measuring more easily, for example how much carbon or waste an organisation generates. However, the ‘S’ was subject to the most discussion, particularly in terms of the lack of well-regarded measurement tools out there to assess societal impact and the success an investment is likely to have in this regard. After all, how do you measure things like happiness and well-being? There are some organisations out there, such as the Social Value Portal, which specialises in measuring the social impact of supply chains as part of the procurement process. However, on a wider basis, the panel recognised the huge gap there is for technology to fill.

In this vein, it is vital that organisations underpin their ESG strategies with effective communications around the social impacts they are making in communities, to satisfy the demand for increased transparency and authenticity on the road to true sustainability. At Instinctif Partners we can help clients to benchmark their ESG reporting, identify appropriate reporting frameworks and embed ESG disclosure into all aspects of their communications.

Subtly different from social impact measurement is the concept of impact investments, which are designed from the outset to deliver clearly defined social impacts, such as providing a certain number of affordable or supported homes, as well as financial returns. Whereas social impact is inherently different to measure, impact investments benefit from clarity of goals. There was an argument put forward that there could be more impact investments in the real estate arena.

The Black Swan: coronavirus

One of the themes that laced through discussions, both between panellists and attendees, is the potential impact of Covid-19 on real estate investment. Although the spread of the virus has accelerated significantly across the last fortnight, at this point in time we still don’t know how the global pandemic will play out, but people were of the view that the ripple effect out of the slowing China economy would no doubt have a wider impact on supply chain, global markets and investment appetite. Of course, it may be that coronavirus is the catalyst for a market correction that has been long overdue. For London real estate investment it is clearly the overwhelming sentiment that Covid-19 could cause more damage than Brexit ever could.

Real estate investment into London is set to remain strong in 2020 although, as discussed, there are certain asset classes that are growing at the moment and others that are seeing some stagnation. Capturing the social value of property investments (and communicating these effectively) will be a key challenge for real estate businesses and fund managers alike, and impact investments may well increase in popularity as a result. Coronavirus is likely to cast a shadow this year, but London certainly won’t stand alone in this regard.