Hollis Insights Conference: Key issues facing the Real Estate sector

12 September 2024 we held our inaugural Hollis Global Insights Conference, with our clients, connections and colleagues coming together to debate some of the key issues facing the real estate sector – solar energy, fire safety, decarbonisation and the repurposing of existing building stock.

It was also a chance to hear from recently appointed CEO, Andy Hay, and get his take on what life has been like in his first 100 days at Hollis.

Solar Energy – the move to localised power sources

Shifting to renewable energy sources is a challenge that the property industry must prioritise. A stat that surprised many of us in the room is that in just one single hour, the amount of power that strikes the earth from the sun is more than the entire world consumes in a year. That is a lot of potential energy to take advantage of.

The benefit of changing the type of energy we use, is that we can also change how it’s stored. With this, we’ll see a move from the aging centralised network, to new, localised networks that feed off of solar power stations housed on the properties we occupy in cities, towns and villages across Europe.

One warning given by Stuart Patience, our head of energy solutions, was that accelerated take up of new practices can result in poor practices from bad contractors, poor design and specification of equipment. This, he says increases the risk of fires related to PV units, which although currently rare, can be catastrophic when they do occur. He stressed that you need to know you are using the right fit-for-purpose systems for the specific PV units and that the equipment being installed is of a high standard. Then it must be correctly maintained and monitored. This is something Hollis is working with David Lloyd on across its network of gyms, to ensure a safe roll-out on their roofs across the UK.

Decarbonisation – design for performance – not compliance

With the launch of the UK’s Net Zero Carbon Building Standard pilot, there is significant focus on the targets for operational and embodied carbon, as well as renewables and refrigerants.

To achieve the UK’s net zero carbon targets in 2050, the decarbonisation of existing buildings is going to be essential – as it’s estimated that 80% of the buildings that will exist in 2050 already exist today.

When undertaking improvement works and targeting decarbonisation, it’s important to design for performance, not compliance. The Net Zero Carbon Building Standard will target whole building energy use. This means going beyond the requirements of an EPC and using a TM54 energy model to more closely model the energy used in a building. Once the energy uses are accurately known they can be reduced.

Building safety and fire – the Building Safety Act 2022

There is a new normal off the back of the Building Safety Act when it comes to building safety management across every stage of the property lifecycle.

Mandatory gateways for higher-risk buildings require regulator approval prior to starting works or occupying existing and new buildings. The new gateways, if not handled with care and attention, could create new financial gaps related to loans, insurance, and occupation.

The liability risk of non-compliance has expanded quite significantly. Parent and associated companies may now be pursued for building safety failures by Remediation Contribution Orders and Building Liability Orders. We expect a requirement for more advice, from more people, earlier, to safeguard compliance.

Repurposing versus rebuilding

Repurposing existing real estate isn’t always the easy option, but it has many benefits, especially on the ESG credentials. Recent shifts in politics, planning regulations and tenant demands have put a sharp focus on the reuse of existing buildings. Much of the success of a well repurposed building comes down to getting the right team onboard from the start. Changing the profile of a space often means adjusting everything from escape routes to M&E. This all needs to be planned accurately and as early as possible, otherwise you risk discovering that one element doesn’t work, and plans may have to be abandoned.

It’s critical to strive to improve the energy performance of the building fabric, especially if you have vacant possession, and to really focus on air tightness to improve operational energy performance. It’s also important to get structural due diligence done early, so you have an idea of what is and isn’t possible. Likewise, involve insurance brokers early in the design process so you know the impact of different plans on your premiums. Also secure any necessary infrastructure upgrades in advance. 

Flexibility in planning and once on site is essential to avoid any surprises and mitigate any hidden issues as early as possible. An argument often made for new builds is that they are more efficient to operate and occupy. However, a stronger case can be made for retaining the embodied carbon in existing buildings, which can save the equivalent of a hundred years’ worth of energy savings. Different sectors face different challenges when it comes to repurposing buildings. Life sciences, for example have very specific needs with regards to ceiling heights, ventilation and water waste. 

However, there are common themes that contribute to success when repurposing real estate, such as really knowing your building forensically to manage risk. Be sure to carry out surveys, as any surprises down the line can have a big impact on time and cost. Similarly, collaborate early for success; bring your professional team together as early as possible to help design your brief.

We’re growing to understand as an industry that having a lifecycle sustainability value is key. Although sustainability can seem expensive initially, the commercial opportunities and environmental factors are worth it. 

Back to the future in real estate

A continuing and increased appetite to fund real estate as an asset class will lead to deeper bidder pools for a wide range of assets.

The gap between valuation expectations and look forward investment appraisals has created market inactivity (macroeconomic and geopolitical issues have clearly impacted this). Market sentiment is starting to stabilise in troubled sub-sectors, This means valuations ought to be trending to a place where deals can get done.

This will result in more normalised market conditions for transactions (Debt, M&A and Restructuring). And will shine a light on the difference between strong projects, assets and operators and those with more structural problems.

David Pike, Managing Director at Interpath Advisory expects us to see a buoyant market, but with an increased capacity for winners and losers.

Real Estate Resurgence: Opportunities and Challenges Ahead

Before our networking session, we wrapped up the day with an interview featuring our Chairman, Digby Flower, and The Sunday Times Associate Editor, Oliver Shah, discussing the future of real estate, the economy, and new labour policies.

With a new Labour government, controlled inflation, and steady consumer spending, the outlook is brightening. Deputy Prime Minister Angela Rayner has initiated an eight-week consultation to overhaul planning rules, aiming for 1.5 million new homes. This includes hiring 300 planning officers, easing development on brownfield sites, and releasing lower-quality ‘grey belt’ land.

However, local authorities face challenges in rebuilding their areas of capability after recent cuts, and regional pushback could lead to tensions with central government. Additionally, supply chains are unprepared for significant expansion, needing more investment and expertise.

On a positive note, corporate activity in the retail market has surged, with capital markets gearing up for a strong comeback and high-yield trading.

Despite this, a significant divide persists between the capital and occupational markets. In London, office turnover in the capital markets is down 26% from last year and 40% from 2017/18. Looking ahead, prime offices in Central London and Central Manchester with strong amenities and environmental credentials will remain in demand but may stand out as surrounding values may decline.