Investment and development trends: beds, sheds and meds
Currently, the landscape for lenders and investors is an interesting one.
We are now in unchartered territory when it comes to predicting trends in the market, but when looking back at the cyclical nature of the market in previous recessions, it gives great insight as to what may be on the horizon.
Research undertaken by Savills and Legal & Contingency examines the emerging attitude towards investment risk and ESG consideration.
Attitudes to risk
The most obvious recessionary and post-recessionary trend, and not just in real-estate, is around attitudes to risk. Generally recessions are caused by an overly relaxed attitude to risk, and thus the inevitable post-recessionary trend is to move to a risk-off approach.
Immediately after all of the last three recessions we saw a sharp rise in investment into income-producing CBD offices and multi-family housing. Investors perceive these sectors as lower risk in times of uncertainty. There was also a corresponding swing away from sectors that emerged from the recession looking over-supplied, the most common victim of this risk aversion being retail property. This time around, while CBD office investment has been slow to recover, many investors are herding towards a ‘beds, sheds and meds’ strategy that is putting upward pressures on pricing in all these markets.
The impact on development
In the real estate world a swing to low risk investing and lending has always been characterised by greater interest in long-leased assets and less interest in assets that have voids and are subject to occupational risk. This generally hits the development side of the market hardest. Previous post-recessionary periods saw two-to-three year periods where development activity fell to 20-30% of normal levels.
While it is clear from investment activity in early 2021 that some of these trends are underway (see chart below), we are not seeing the classic story of development starts on existing projects being delayed.
Developers are clearly feeling more confident about the future than they have been coming out of previous crises. In part this is due to lower void levels across most segments of the market than we have seen in other recessions, but in some parts of the real-estate sector we believe that this confidence is connected to an understanding of the “new normal”.
Office developers are pushing ahead with delivering high quality ESG-compliant schemes in the belief that while overall demand for office space might be negatively affected by changing working patterns, companies will still need offices and the office space that they will choose will be the best.
Logistics and housing developer confidence is quite rightly being supported by record levels of tenant and buyer demand. The one segment of the market where the only development story in town is re-purposing is retail. However, even here we believe there are development opportunities whether it be to convert department stores into student housing or lab space, or entire malls into office schemes.
While the majority of investors and lenders are less willing to be exposed to development than they would be in a more normal market, this will change as prices rise on assets that perceived as less risky.
Eventually, as is normal in a post-recessionary period, the lure of higher returns will pull more investors into refurbishment and development. However, in the short-term we believe that this will be an attractive and prosperous hunting ground for those investors who understand both the old and new risks that are attached.
Developing or investing in real estate? Legal & Contingency provide you and your legal team with support to manage the legal risks associated with your projects.
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