We co-hosted our UKREiiF roundtable with the fantastic real estate research team at Aberdeen Investments, bringing together senior investors, funders and industry leaders to explore how resilience can unlock opportunity in a volatile market.
Key takeaways included the continued strength of real estate as a long-term portfolio diversifier, the importance of focusing on structural growth themes such as health, technology and sustainability, and the opportunities emerging from changing capital flows and evolving investor priorities.
The discussion reinforced that those able to adapt, remain disciplined and focus on long-term fundamentals are best placed to capture value in today's market.
Real estate continues to earn its place in investment portfolios
Real estate has delivered attractive risk adjusted returns for investors over the last twenty years, underpinned by stable cash flows, modest capital growth and with low volatility. Aberdeen believes the role that real estate plays in investor portfolios as a key diversifier can be highly effective, particularly as equity and bond correlations have reached all-time highs. Lofty equity valuations and concerns around fiscal discipline are distorting the outlook for the two mainstream asset classes, leaving real estate as a strong consideration for investors today.
“Legal due diligence remains key and should also test the underlying performance fundamentals of each asset including: title to the property, lease and operating income, financing assumptions, tax structuring, ESG compliance and any asset-specific regulatory constraints before investors rely on real estate as a portfolio diversifier. Mills & Reeve has a market leading national real estate practice with over 140 lawyers advising investors and funders on all real estate related transactions with specific finance, tax and ESG expertise.”
Our reaction function matters – validating what is changing
Given the dual forces of ongoing geopolitical tensions and the fastest pace of technological transformation we have ever seen, volatility in markets is never far away. Filtering out what is noise and what is an investible signal is the key challenge for investors today. We can do this by ensuring our reaction function is rational and repeatable by following key principles when an inevitable shock to the markets arrives.
Acknowledging the disruption, carefully validating exactly what it is that has actually changed, and planning a response, or indeed no response, represents three steps we can use to process the next shock.
“Any process for reacting to market shocks should be supported by documented governance, clear investment committee authority and a defensible decision-making record. Where assumptions change materially, managers should consider whether investor communications, valuation policies, financing covenants or regulatory disclosures need updating and seek legal advice at an early stage.”
Three target areas to capture the best of real estate
To minimise risk and to capture growth, we believe that focusing on strategies with long term structural demand-side dynamics can position investors to secure the resilient returns they need – be it long term stable cash flows or growth. The three key thematic trends are: health, wealth and demographics, transformational technology, resilience and sustainability.
“The three themes are legally relevant because each carries different diligence priorities. Healthcare and demographic assets may raise care, operational and safeguarding considerations. Technology- led assets may involve power, data, telecoms and grid connection issues. And resilience and sustainability strategies require careful legal review of testing the ability to deliver and measure target improvements via green leases and EPC, MEES environmental and planning obligations.”
Investment themes: Modern industrial
The presentation introduced three areas of considerable change, but also opportunity, that investors can harness.
Europe and the UK's need to build strategic autonomy across key economic value chains will drive increased demand for modern industrial property. Global fragmentation and constant supply chain disruption means we need to produce more in Europe for Europe. Be it for new green technologies, pharmaceuticals, defence and security or food & agriculture, we need to build resilience into our economy, and this will create opportunities for investors.
“Industrial and strategic autonomy assets will require particular attention to planning use, environmental permitting, utilities, grid capacity, transport access and supply-chain resilience. Where assets support defence, pharmaceuticals, food or green technology, investors should also consider the legal implications of sanctions, procurement, national security screening and sector-specific regulatory overlays.”
Investment themes: Central London office market
The central London office market is starting a cyclical upturn.
Structurally low supply, ongoing demand polarisation between "the best and the rest" and the emergence of new office nodes along the new Elizabeth Line will create new opportunities for investors. The sector has been unloved for over five years, but we are returning to an undersupply situation that is driving a new rental growth cycle.
“For central London offices, legal review should focus on lease expiry profiles, rent review mechanics, service charge recovery, refurbishment rights, vacant possession strategy, business rates, compliance with building safety and energy performance requirements. Given potential reform to upwards-only rent reviews, assumptions on future rental growth should be stress-tested in transaction documents and financing models.”
Investment themes: Destination UK
UK capital markets are evolving in terms of scale, structure and strategy. UK institutional capital is coming through a period of restructuring with LGPS pooling creating six large capital pools with new requirements and strategies.
DC capital and the rise of master trusts will lead to several large pools of capital emerging with a unique new set of return and liquidity requirements to meet their member's long-term retirement needs. Insurance capital and UK annuity origination will lead to rising demand for long-dated, inflation-linked income asset.
Global capital is starting to come back to life again, with the UK a key destination.
“Changes in UK capital sources may affect liquidity, investment horizons and acceptable risk allocation. Managers should ensure that product terms, redemption mechanics, valuation procedures and disclosure documents are consistent with the requirements of their investor base, whether pension, DC capital, insurance and overseas capital, particularly where long-dated or inflation- linked income is being targeted.”
Top picks for asset selection: Industrial
Regional distribution warehouses
“Regional distribution warehouses should be assessed for access rights, highway arrangements, planning conditions, environmental permits, energy capacity and occupier logistics requirements. EPC and MEES risks may be material where older stock requires capital expenditure to remain lettable and financeable.”
Retail warehousing
“Retail warehousing diligence should test planning permissions, permitted use restrictions, tenant mix, rights to reconfigure units, service charge arrangements and estate management controls. Investors should also consider exposure to consumer sector insolvency risk and whether lease terms preserve flexibility as occupational demand evolves.”
Top picks for asset selection: Offices and retail
Central London offices
“Central London office acquisitions should include detailed review of occupational demand, refurbishment obligations, statutory compliance, building safety responsibilities and sustainability credentials. Lease drafting should preserve landlord control over energy upgrades, data collection and green lease cooperation where possible.”
Supermarkets
“Supermarket investments should be reviewed for covenant strength, lease length, rent review basis, repair obligations, turnover-linked provisions and restrictions on assignment or underletting. Competition, planning and petrol filling station or environmental liabilities may also be relevant depending on the site.”
Top picks for asset selection: Health and care and living
Healthcare
“Healthcare assets may involve operational regulation, CQC-related considerations, long occupational leases, specialist fit-out obligations and reputational risk. Mills & Reeve has a market leading heath and care sector with regulatory experts. Investors should ensure the tenant’s regulatory status, service model, assignment rights and continuity planning are subject to full due diligence.”
Single family rentals
“Single family rental strategies should be reviewed against the evolving residential tenancy regime, consumer protection requirements, property management standards, deposit protection, rent increase controls and enforcement risk. Scale platforms will also need robust governance for repairs, complaints, data protection and tenant communications.”
Our final thoughts
The UK’s transparency and liquidity are positives, but investors should be alive to the dynamic legal and regulatory landscape across planning, building safety, residential reform, commercial leasing and ESG regulation. Any UK allocation should therefore be supported by jurisdiction-specific due diligence, clear risk allocation in acquisition documents and ongoing compliance monitoring after completion.
To discuss any of the topics discussed in more detail, please get in touch with a member of our built environment team.
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