Appetite for office assets and student accommodation has plummeted in the wake of Covid-19, according to research from CMS. 

The research also highlighted a clash of opinions over the importance of ESG-focused real estate between investors, occupiers and real estate professionals.

Real Estate Reset, the eighth annual survey from the law firm, found that 33% of real estate professionals and investors polled thought offices were an appealing asset class, down from 54% this time last year. Just 24% said student accommodation was appealing, compared with 49% last year.

Residential, industrial and logistics, and healthcare all saw a significant uptick in appeal.

The firm’s head of real estate Ciaran Carvalho told Property Week: “It’s a bit like the stock market – when there’s a sudden shock, there’s a plunge in the stocks and everything goes down. The first reaction to people having to work at home naturally led to people thinking life is changed forever and that’s the future.”

CMS partner Clare Thomas added: “The office was seeing a resurgence in investor appetite around last year. But there is nervousness on the back of the pandemic around how people are thinking about offices at the moment. That said, I think there is still recognition for good-quality offices.”

When asked how optimistic they felt about the UK real estate market in the short term, just 24% felt very optimistic (1%) or quite optimistic (23%). Some 42% of professionals felt pessimistic about the market’s short-term prospects, up from 31% a year ago, while 34% felt neutral.

Despite the pessimistic overtones, the CMS report points out that the market is more optimistic than it was after the Brexit vote in 2016, when 64% of the market felt downbeat.

Respondents were more behind the valuation of London real estate this year, with 55% thinking it is fairly valued, compared to 36% a year ago. Just 4% believe real estate in the capital is undervalued while 41% think it is overvalued (2019: 55%)

Appetite for regional cities has dropped off in the last 12 months according to the report, with a fall in appetite for investment in each of the “big six” cities.

The office vs working from home

For the first time, CMS surveyed office occupiers in its yearly research. More than 1,500 senior office occupiers from the UK, Europe and Asia were asked about how their working world was changing and what the future held for their office arrangements in a post-Covid world.

Overall the survey found that a mix of home working and office time was the preferred option for most people.

In terms of when people plan to return to the office, Occupiers in England + Wales and Scotland expected to be back in the office at least part tie by mid-October (although the survey was conducted ahead of recent rises in Covid-19 cases).

Early October was the average anticipated “back to work” date. Occupiers in Poland, Central Europe and the Czech Republic said they expected to be back this month while Singapore, one of the first places affected by the outbreak, thought it would be a more conservative early November return.

Just 37% of occupiers surveyed in England + Wales thought their office footprint would remain the same after Covid-19. Just over a quarter (26%) thought their businesses would downsize their office space; 24% thought it would be split into different locations; 13% anticipated a move while 7% said they thought the company would do away with office space altogether.

Social Purpose

The report asked real estate professionals and the office occupiers what their priorities were when it came to ESG.

The survey found investors were significantly more focused on ESG values than real estate professionals and office occupiers, who were included in parts of the survey for the first time this year.

Asked how important working in an environmentally sustainable building was to them, 77% of investors answered ‘very important’, compared with 32% of professionals and 42% of occupiers.

Similarly, 80% of investors said their businesses had and widely communicated a corporate social purpose, compared with 53% of industry professionals and 40% of occupiers.

The survey found that 65% of senior office occupiers would be willing to take a pay cut to work in an environmentally sustainable building. This was slightly higher in England + Wales where 69% would be willing but higher than in Scotland where 56% would be happy with the trade off.

“Our over-riding aim is to integrate ESG into our decision making at all times,” Aberdeen Standard Investments head of real estate ESG Dan Grandage said in the report.

“If an acquisition doesn’t fit our criteria I can vote against that on the real estate investment committee, but if my team doesn’t support the acquisition it’s unlikely it would make it to the committee anyway.”

Savills Investment Management head of UK Harry de Ferry Foster added that investors were increasingly recognising the value of “ethical” investments.

“These types of investment aren’t for everyone but those who do embrace it and are clearly in it for the log-term will be rewarded.”