The property sector is more nuanced than ever

So many previously unseen influences distort markets, rendering property investment more nuanced than it has ever been.

At our HQ, we spend a lot of time talking about opportunities arising from an unusually uncertain future and unrecognised headwinds. For example, the concept of ‘off-market’ deals is dwindling as property becomes increasingly commoditised. That removes a historic commercial advantage, reducing margins before we even face new external challenges, but does it mean that game is up?

We are in a world rightly committed to significantly improving the environmental standards of our planet, yet the measures by which different industries are benchmarked and interests aligned are hopelessly disconnected by those more eager to set targets than understand how to achieve them.

For example, the EPC, a crude, inconsistently applied benchmark, is of zero interest to occupiers pursuing their own ESG ambitions, yet the property owner can suffer a value impact if its assets do not meet certain tests. EPCs have been allocated as a cost solely for the property owner. How can that be equitable, for example, with long FRI leased property? And how does an owner gain access to do works when the lease doesn’t permit it?

’Greenwashing’ must be seen for what it is, but may well distort markets for some time

But the value bifurcation as a result of non-compliant buildings being ‘stranded’ may present an opportunity for types of (probably private) capital that will be raised to improve the ultimate ratings of property, not just its current status.

Flexible leasing and occupation were significantly progressing way before the pandemic and now WFH is another challenge for investors. Markets always adjust to change, and employment practices are no different, but the notion of a one-size-fits-all response from government to the workplace is impracticable, as it is likely to end in significant short-term unemployment.

Employees wanting a better quality of life seek to transition to flexible work only to find too many are doing the same – and jobs dry up. Employees also realise WFH can mean WFAC (working from another country) by someone doing it at half the cost.

And while it may suit a big accountancy firm to tell staff they never have to work from an office again, have they consulted their clients? From our experience, sometimes WFH really does not deliver the high-quality service for which they charge – and so change will happen. Who dictates terms – the service provider or the client?

So will we see significant change in the office market, creating opportunities for investors?

The debt market’s obsession with ‘green’ or ‘impact’ lending and ESG-compliant projects is already stretching the definition of those terms. ‘Greenwashing’ must surely be seen for what it is, but may well distort markets for some time, and provide a hunting ground as assets once considered suitable candidates for investment no longer qualify.

At least the increasing threat of inflation is familiar to us Boomers as we have seen plenty of that. It adds to the market confusion and potential dysfunctionality, which hopefully will breed opportunity. It may take some time, but there is more than a mild possibility that pricing for assets that don’t tick the box will soften – possibly quite a lot.

Nick Leslau is chairman of Prestbury Investments