ESG will be front and centre when markets recover: CMS

ESG and social purpose are set to take centre stage when the real estate market emerges from lockdown but in the meantime there is increased pessimism about prospects for UK property among 42% of industry leaders.
So says law firm CMS which has surveyed real estate leaders, corporate office occupiers and institutional investors to discover the impact of Covid-19 on UK real estate and priorities for the sector beyond the pandemic.

Photo: Bill Oxford, Unsplash.

The document, Real Estate Re-set: Offices and Purpose Beyond the Pandemic is CMS’s eighth annual real estate report and found that ESG (environmental, social and corporate governance) is having a transformative effect on real estate “principles and mechanics”.

According to the report, 42% of industry leaders are pessimistic about the outlook for the UK real estate market compared with 31% in 2019 and 24% in 2018.

While 41% believe the London real estate market to be fairly valued, 55% of respondents believe it is overvalued.

Unsurprisingly, opinions about the appeal of retail assets have tanked. Only 3% said it was an appealing asset sector compare to 35% in 2016; 33% of respondents said office assets are “appealing”, compared to 60% in 2016; while only 9% said hotels and leisure is an appealing sector, compared to 47% in 2016.

Perhaps less expectedly, student housing has lost some of its draw with 24% finding it appealing this year compared to 51% in 2016. Distribution and logistics continues its upwards trajectory and 84% described it as an appealing asset class, compared to 64% in 2016.

Healthcare appeal increases

Similarly the appeal of healthcare has increased to 71% from 44% in 2016 while residential assets appeal to 62%, compared to 46% in 2016.
But healthcare dominates occupier demand and 55% of industry experts expect increased demand in the next two years compared with 32% in 2016. Respondents also expected an increase in demand for distribution and logistics but a decrease was envisaged in all other sectors.

The survey found that 61% of occupiers said they would be refurnishing their offices when employees return to the workplace. CMS said this suggests that, in the mid-long term, offices will continue to endure and thrive, albeit in a different form and configuration.
The survey found that 92% of investors said they will invest more into companies which have a strong ESG strategy in a post-Covid-19 world.

While 99% of global institutional investors have articulated a corporate social purpose, the real estate industry and occupiers not as advanced at 79% and 76% respectively.
Nevertheless, 62% of occupiers say corporate social purpose has become more important post-Covid-19 than pre-Covid-19 and 65% of global occupiers would take a pay cut to work in a sustainable building.
CMS said the publication is the result of a survey, undertaken in July on its behalf by FTI Consulting. The survey sought the opinions of over 1,500 occupiers across the UK, Europe and Asia as well as 250 real estate professionals and 520 institutional investors.

“Even before the pandemic, the real estate industry was embarking on a period of seismic change. The transforming environmental, political and social landscape and rapid advances in technology were changing the way we build, where we build and our relationship with where we live, work and spend our leisure time,” said CMS partner and head of real estate Ciaran Carvalho.