Savills: Covid-19 prompting lenders to sharpen their focus on the S of ESG

During its latest Financing Property presentation, the consultancy said the pandemic is leading sponsors and financiers to increasingly consider social factors when futureproofing assets.

The pandemic has put a spotlight on people’s health and wellbeing, prompting the real estate industry – including lenders – to think deeper about the social impact of its activities, according to Savills.

During the property consultancy’s 33rd annual Financing Property presentation, Ian Malden, head of valuations at Savills, said that although expectations for lenders to take a clear and constructive stance on environmental, social and governance matters had already grown in 2020, debt providers now need to give further consideration to the social aspect.

He said that, as the ‘S’ of ESG becomes a greater priority for occupiers and developers, the need for lenders to understand a borrower’s social sustainability values and goals in order to invest in their own “social stake” has become increasingly relevant.

During the webcast, Malden said the covid-19 crisis was one of social significance rather than financial, meaning the “agenda has also shifted to re-focus particularly on the social element of ESG”.

“The importance of social has been accentuated by the pandemic, not just in terms of wellbeing, but also community,” he said. “Occupiers are much more discerning as to the space they are prepared to occupy, the space developers and owners must provide to secure and retain tenants, and ultimately how the space will be financed. We anticipate a widening gulf between the buildings that can meet ESG requirements and the rest.”

Futureproofing offices

Savills discussed the future of the office sector during this year’s presentation. Katrina Kostic Samen, head of workplace strategy and design at KKS Savills, the advisory’s design studio focused on workplace strategy for occupiers, said the social aspects of office property are particularly relevant now that most businesses are looking to attract employees back to the workplace and retain talent moving forward, for which futureproofing is crucial.

“The social section is the most important this year to come the grips with: what do occupiers want; what do employers and employees want; what do their contracts allow them to do?” she said. “This is starting to become an enormous subject and what we have to do is to unpick why everybody seems to be liking working from home.”

According to Samen, it is crucial for employers to balance what their employees want with the overall needs of the business. “We have seen numerous reports of occupiers looking to ‘right size’ their portfolio,” she said. “However, understanding their people first, setting new protocols for a balanced work-life routine, and lease expiry constraints, needs to be considered to maximise flexibility, address perception and manage risk.”

 UK recovery

Speaking about the wider UK commercial real estate markets, Savills said a key differentiator between the recovery from this crisis and previous crises will be London’s path to recovery. According to Mat Oakley, head of Savills’ UK and European commercial property research team, the UK capital is recovering slower than the country’s regions, unlike during previous downturns.

Oakley said London office take-up in Q1 was 43 percent below average, while regional leasing activity was 25 percent below average. However, Oakley added: “This trend is expected to change in the next 18 to 24 months when the capital returns to its position of growing faster than any UK regional city.”

The consultancy also warned of disruption in the UK residential lending and development markets. Lucian Cook, head of UK residential research at Savills, said: “Recent price growth places a huge emphasis on the government’s mortgage guarantee scheme. Unless it significantly increases the availability of higher loan-to-value mortgages on competitive lending terms, we could see real pressure on first time buyer numbers over the medium term,” he said.

Cook said the prospect of the UK government’s Help to Buy mortgage scheme coming to an end in April 2023 will be a concern to developers. “Together with changes to the planning system, rising costs of meeting environmental targets and the introduction of new policies such as First Homes, it is pretty clear this means the economics of housing delivery are going to change.”

Focus on quality

Across sectors, lenders are becoming more selective as to the assets they are prepared to lend against, said Malden. “Some are less willing to finance short income offices, given potential expenditure voids and capex at a time when there is uncertainty around office occupier intentions,” he said. “However, competition for prime propositions is intense, driving down margins.”

Overall, Malden said Savills sees a highly liquid lending market with relatively low levels of distress. Malden added: “Like the economy, the lending market is much more robust than it was in the aftermath of the global financial crisis and previous recessions.”