We live in an age of uncertainty. One black swan event after another has arrived to undermine the near decade of stability and growth the world enjoyed after the 2008 Financial Crisis; the departure of a major world economy from the European Union. A global pandemic. Land war in Europe. The next "thousand year" event unleashed by climate change.
The global property market has not been immune from these economic shocks. Increasingly, investors are asking difficult questions about the uncertain future of their assets. Will office space continue to decline in the face of hybrid working, or just evolve into something different? Will the hot industrial and logistics market begin to cool, like Netflix and Peloton shares post-Pandemic? Will the re-emergence of the long-dormant prospect of inflation and interest rate rises take the shine off the high-end property market?
Truly secure investments are hard to come by in an era of such volatility. Yet for a family office wishing to invest in real estate, London remains the premier global destination for their capital. Despite Trussanomics, London still offers unparalleled stability and security, as well as huge market depth, for the bold and prescient.
External market pressures have accelerated the end of the era of the passive property investor; the largest returns are increasingly being realised by those willing to forecast and engage with the sector’s emerging trends, and the requirements of prospective tenants.
Private capital with its innate speed and length of view is uniquely placed to take advantage of this.
So here are some key considerations from our view of the London market.
Ensuring success: ESG
Environmental, social and governance concerns are already shaping the future of the global economy, and the property market is no exception. In the United Kingdom, the increasingly strict EPC and MEES requirements are introducing a new dynamic to landlord-tenant relationships, both commercial and residential. A spirit of cooperation is required to both put buildings into an energy-efficient state, and to keep them that way. The pressures are not just top-down and legislative, but driven more than ever by tenants’ wants (space that will attract their employees) and values (community engagement/net zero).
Green requirements are creating a wide pricing disparity between environmentally ‘good’ and ‘bad’ buildings. The best new buildings have a trophy premium, but with the right advice on the ground, opportunities have opened up to retrofit older stock, and to create rapid value uplifts in a much shorter timeframe, and with much less outlay, and hence less risk, than with a traditional knock-down and rebuild planning-led approach.
Flight to quality & ‘hotelification’
This is of course part of a broader ‘flight to quality’ when it comes to commercial occupier demands. Research by Boodle Hatfield published in the Financial Times reveals that although England’s available square-footage of office space has fallen at the fastest rate for 20 years, at the same time a record number of companies are also signing their first office leases in London. “Levelling-up” is not a phrase heard much amongst City investors. Those occupiers newly arriving in the capital – or simply re-assessing their office requirements post pandemic – value flexibility and ease of use above all else. New companies who have been in serviced office space may expect a similar degree of operational ease in their more permanent home, while many larger firms are looking to attract employees back to the office with the promise of a high-quality working environment. Increasingly, employers are looking to offer staff more than just a desk, but creatively-designed offices that facilitate face-to-face interactions they can’t get at home.
Those landlords that embrace this ‘hotelification’ of office space, and offer additional services that occupiers want, are likely to attract a significant premium on their assets.
Closely tied to this is the need to future-proof assets by ensuring they are up-to date with emerging technological trends. Property may represent a relatively stable investment compared to the volatility of the tech industry, but private investors across all sectors need to be alive to the opportunities that technology offers. The emergence of new asset classes within existing users, from car charging points to green data centres, from vertiports to vertical farms, from dark kitchens to dark stores, offers private investors with a long-term view, the opportunity to become early adopters, and to ride the trends, ahead of more cautious institutional investors.
Residential property and legislative changes
So what of residential property? London shows no signs of losing its crown as a global capital of super-prime homes. Iconic redevelopments such as the recently opened Battersea Power Station complex are offering domestic tenants the opportunity to buy into a piece of London’s history and its attendant lifestyle – again the key is renewal and revival, the reinvention of the historic core for a new generation. Suddenly, demolition looks very 2007.
The fact remains, however, that the UK Government seems intent on delivering the largest reforms to residential property law in a generation. Developers of new residential leaseholds have already see the Leasehold Reform (Ground Rent) Act 2022 curtail their ability to charge ground rent. It now seems certain that a second phase of legislation will look to streamline the ability of domestic long lessees to extend their leasehold or to buy their freehold. Again, however, innovation and complexity brings opportunities. Private investors with robust legal and professional advice – we have been advising clients in this area for 300 years – can both protect their assets but also take advantage of these potential pitfalls.
It is evident that there is a broad trend within the London market towards environmental premium, technological capability, and reinvention. Agile private capital can have the vision and the speed of decision-making to move ahead of slower-moving investors, and to make the most of their adaptability to thrive in this evolving market, working hand in hand with trusted local experts, legal and advisory, who can lead them through the maze. For investors who think long and move fast, London remains a city of unparalleled opportunity.
This article was first published in the Family Office Magazine in December 2022.