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UK Real Estate Horizon Scanning 2022

How are your nerves?

Over the last year, the world of real estate has at times felt like a theme park ride with huge highs of confidence followed by sweeping lows as Covid restrictions or supply chain issues hit home.

As things stand, the rollercoaster looks likely to continue into 2022, with more ups and downs to follow as the market responds (on the up-side) to a lack of supply of grade A well-located office space or logistics facilities and (on the down-side) to travel restrictions making investors’ lives difficult.

Despite these stomach-churning events, so far I don't get the impression anyone wants to get off the ride. 2021 has been for many the year in which the real estate market found its confidence again and whilst opportunities continue to open up, often in new and alternative areas, the deals will continue.

Nonetheless, it’s obvious that 2022 won’t stay on exactly the same tracks as 2021, not least because the legal landscape is changing and this forms the backdrop to transactional activity. In the following pages, the Linklaters Real Estate team have highlighted some of the most important themes and legal issues which we think will influence what sort of ride 2022 holds in store for us.

I hope this publication offers you a chance to step off the rollercoaster ride for a short while to consider the direction in which the market and your business is heading, and maybe even present a few ideas to exploit a new opportunity.

Best wishes for a successful (and exhilarating) 2022.

December 2021

Key topics

An upended market is often a harbinger of a flight to quality. The real estate market has certainly been upended and investors are showing signs of flight. The demand for quality is strong across real estate asset classes. Take logistics and offices: each experienced the pandemic differently, but investors in both are willing to pay a significant premium for the top stock. As part of the post-pandemic rebound, the market will need to ensure a continued supply of premium product and devise strategies for secondary and tertiary space. However, the rebound is not without challenges – for example could strained supply chains and a brewing real estate crisis in China suffocate the flickering flame of recovery? 

Over the last year, we’ve continued to witness a major structural change in UK commercial leasing. Flexible office providers remain popular, and we’re seeing more and more traditional landlords coming to terms with the fact that tenants require increasingly flexible leasing terms. Built in flexibility via tenant break rights is in favour and, in the retail space, landlords and tenants are looking more and more towards turnover rents as a means of creating a more balanced approach to rental liability. Pandemic clauses are becoming increasingly commonplace too, a clear signal that tenants are taking a conservative approach to risk in their lease negotiations – and given that insurance is not currently available in the market to cover pandemic related loss of rent, such clauses are introduced at the landlord’s cost.

As the world breaks free from the clutches of the pandemic there is immense focus on all fronts, including across the real estate sector, on the transition to clean and green in line with fast evolving national and global climate priorities. Speaking in advance of COP26, Boris Johnson highlighted that the world needs to make “big commitments” in four specific areas, one of these being “cars”, and urged the world “to follow the UK lead and abandon fossil fuel internal combustion engine machines”. This gained some traction at COP26 with various governments, business and investors signing a commitment to work together towards all sales of new cars and vans being zero emission by 2035 in leading markets and globally by 2040. Of all the promises made at COP26, it seems that these clear time-specific objectives regarding electric vehicles allow for the most cautious optimism and a “glass half-full” attitude.

Fuelled by the successes of COP26, Environmental, social and governance issues will continue to dominate the public and political agenda in 2022 with real estate investors and lenders alike focusing on the ever-growing ESG-focused legislation expected to be implemented over the coming months.

Long gone are the days when real estate investors and lenders sought and appraised real estate assets solely based on their environmental credentials. The Covid-19 pandemic has left an indelible mark on the real estate sector, pushing the ‘social’ and ‘governance’ limbs to the fore in 2021 and driving demand for real estate assets which are able to demonstrate compliance with all three of the environmental, social and governance limbs. 

At the time of our 2019 UK Real Estate Horizon Scanning mailer, we expected that by now there would be a new register of beneficial owners of overseas entities that own, buy or let UK property. Three years have since passed and despite transparency remaining high on the agenda, we are no closer to seeing this register come into play. The delay is not due to a change in the investment landscape or a lack of interest in transparency. In fact, it is quite the opposite; the investment landscape remains the same, with many foreign investors looking to invest into UK real estate through off-shore structures, and transparency issues continuing to move on and off the front pages. 

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UK Real Estate Horizon Scanning 2022



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