As we emerge from the latest lockdown, the extent to which real estate as an investment asset class will be permanently changed is unclear.
In some cases, the pandemic has accelerated structural trends that were already under way. Other apparently major changes will disappear as quickly as they came. But the pandemic and associated government action may result in some unanticipated challenges.
One immediate issue concerns the risk associated with navigating out of the moratorium on landlord rights. Given the potential for dispute, unwarranted behaviour and negative investor perception, this government imposition may have created more problems than it was intended to solve.
Once landlord rights are reinstated, the relationship between owners and occupiers will need to evolve rapidly. Reward and risk will often need to be shared, in a spirit of driving mutual success. There will need to be an ongoing dialogue to ensure that residential and commercial buildings that meet occupier needs now and into the future can be provided, from both an economic and ESG perspective, but that also provide perceived security of income to investors.
Awareness of health and wellbeing has also been amplified as an issue and is here to stay. The pandemic has created more focus on infectious disease and how that affects real estate. Creativity will be needed to repurpose the built environment, with a focus on recycling buildings, rather than relying on wasteful demolition and replacement.
As to the economic role of real estate, the levelling-up agenda is centre stage. The Centre for Cities calculates that the levelling-up challenge will be four times harder after the pandemic in terms of people in northern cities getting better opportunities. As investors, we will need to adapt but also behave with the long term in mind, to ensure that levelling up leads to a positive re-rating of towns with potential, rather than an averaging down of already successful areas.
In parallel, potentially significant changes are on the way from RICS, where a fundamental review of the approach to valuation is taking place that could either enhance the status of the sector or protect an unsatisfactory status quo.
Simultaneously, the government has announced its intention to conduct a root-and-branch review of the relationship between landlords and tenants, potentially leading to changes in primary legislation, which in turn could enhance or undermine investors’ confidence in the sector. This project will have a generational impact, and its importance must not be underestimated.
Finally, in a year in which climate change is firmly on the agenda with only six months to go until COP26, investing in a sustainable future and working to deliver a transition to net zero has never been more urgent.
The need to ‘build back better’ is not a simple task. Like never before, the real estate investment sector needs to innovate, adapt and prove the scale of positive contribution it can make to society.
Bill Hughes is head of real assets at LGIM