Association of Real Estate Funds: 20:20 Vision

22 January 2020

The Association of Real Estate Funds held its first seminar in the new decade on its outlook for the London/UK real estate market. Some predictable themes and issues arose (Brexit…) but some unexpected ideas were also floated (opportunities in the retail sector) and the overall sentiment was cautiously positive and upbeat.

Mat Oakley (Director, Commercial Research at Savills) put forward a number of interesting ideas. His view was that whilst Brexit still loomed large as a market-slowing force, the new and somewhat tentative stability offered by the Conservative majority and its promise for a quick Brexit meant that risk averse investors such as Euro and Yen funds will start to return to the UK market. This optimism was reinforced by Lord Jonathan Hill (Senior Adviser at UBS / Conservative peer) who stated forcefully that in the next few years and post-Brexit, the Government would be set on boosting the economy and would be ‘turning on the taps of fiscal spending’ in order to do so.

Meanwhile Oakley also mentioned that the London office space has seen historic highs on rents with demand continuing to outstrip supply, meaning that opportunities for office development are ripe. His advice was that high quality offices let to serviced providers might be a good bet for investors in the market. Perhaps most notable, and refreshing, was his assertion that the drop in retail capital values by 30-40% over the last few years means that prime retail in places people want to go and spend are beginning to look cheap, and in respect of which opportunistic investors may be able to take advantage.

Paul Richards (Managing Director, AREF) labelled his three priorities for AREF in 2020 as: Brexit, liquidity in the UK real estate market, and social & environmental impact of real estate. Alighting on this final topic, there was some audience interactivity with a live Q&A stream where attendees queried how much of the focus on Environmental, Social and Governance (“ESG”) is mere lip service and whether the market would ever compromise returns for the sake of ESG. This thinking was not supported by either Richards or fellow panellist Anna Xu (CBRE Global Investors and member of FutureGen Committee). Not only are investors prioritising ESG concerns – Richards shared a personal anecdote from his time at Mercer: in 2017, he felt a shift when clients asked for ESG impact assessments to be undertaken independently of value / income for investment properties – but also there is a growing feeling that ESG concerns need not be divorced from value creation. As Xu pointed out, ESG is now more than ever a part of overall fund strategy; soon, the definition of ‘prime’ property and valuations flowing from that will necessarily include environmental and social performance.

Also worthy of mention by the panellists was the UK housing crisis and its impact on the market. Lord Hill stated that the housing crisis is understood by the government and all politicians and is a top priority. The panel discussed whether private employers might step in to build houses given the escalating scale of the issue – for example Google’s $1 billion pledge to build homes near its California HQ to address a similar housing issue in the Bay Area. However, as Richards noted, funds are crying out to invest in PRS but there is a dearth of suitable opportunities.

Overall, the speakers were aligned in a relatively unified chorus of cautious hope. Whilst the key issue for the next year remains Brexit, there was a palpable sentiment that a corner has been turned and the market is making positive steps forward with a more holistic approach to construction and the property lifecycle.

How much of the focus on Environmental, Social and Governance (“ESG”) is mere lip service?