|Real Estate spotlight

Insights from AXA Commercial

Spotlight on real estate conversation

Real Estate spotlight

A change in portfolios and the need for collaboration are the required response to the change to home working and online shopping

19 July 2021

Predicting what will happen to the commercial real estate sector post-Covid, both office and retail space, is a difficult one.

With the huge shift to home working and online shopping now all but accepted as permanent features of our economy, you’d imagine that the commercial real estate sector would be worried, very worried.

But that’s far from being the case. They see challenges yes, but they seem to be up for tackling them.

“The sector knows it will be a challenge but what they are saying to me is that they are just going to have to get smarter about what an office looks like and is expected to be,” says James Purvis of JPIC Group, a firm that advises large real estate organisations on insurance.

“They are looking to develop their portfolios to reflect a change in the expectation of what an office looks like but there is no suggestion there will be a complete fall off in accommodation.”

This is a view reflected more broadly in the sector.

According to a survey of more than 500 real estate, construction and planning organisations conducted by law firm Fieldfisher, office space remains the most popular asset class, with 43% of respondents highlighting it as one of the areas they were most interested in.

Furthermore, while 78% of respondents said they expected demand for office leasing to be lower than it was pre-Covid, 65% expect to see increased demand for serviced or flexible workspaces.

More than that, there’s an expectation that office spaces will be repurposed to become mixed use to include office, retail and entertainment spaces.

“Portfolios will look different,” says Purvis. “They will repurpose assets into different types of usage – offices mixed with residential and space.”

One example of this is Grosvenor Estate’s West End scheme, which has been granted planning consent for a £500m mixed-use structure connecting Mayfair to Oxford Street. The site will be transformed into 204,000 square feet of sustainable grade A office space, 33 homes, 67,500 square feet of shops, restaurants, cafes and a hotel.

All this starts to paint a rather positive picture but Purvis has concerns about whether the insurance industry can adequately support this vital transition.

“There is a fundamental challenge around whether the insurance sector can keep up with the requirements of real estate as it tries to morph and change and offer different types of properties.

“At the moment, there is not enough evidence that the underwriting community are there yet.”

Although the industry hasn’t so far seen a surge in demand for support in making the transition, there doesn’t seem to be a huge amount of angst about underwriting these repurposed spaces.

Graham Bailey, Underwriting Manager, AXA Real Estate Specialty, says that buildings repurposed in this way will naturally be exposed to new risks as increased restaurant or cooking facilities bring increased fire hazards and residential use brings more material damage risk.

But he’s pretty sanguine about what this will do to overall risk profiles: “The hazards or underwriting concerns of a company associated with a trade type might change but the new underwriting considerations are well known to us.”

Of more concern to Bailey is the real estate sector’s increasing desire to use sustainable building materials such as cross-laminated timber.

“The insurance industry doesn’t have the experience to really understand and qualify how effective these materials are in fire,” he says.

“We have seen papers about how cross laminated timber would char in a fire and resist the fire, but our business resilience managers would argue that this is unproven, and the material untested.”

It’s a problem that appears to have no quick fix and with the ghost of Grenfell looming large behind underwriters, it’s perhaps understandable that they’re insisting on hard data rather than assurances that these materials are fit for purpose.

Bailey describes the sustainable materials issue as “the elephant in the room” and says there’s a risk that the real estate and insurance sectors could hit an impasse.

“Collaboration is the answer and we need to work together to find the right outcomes,” he says.

“We would like to work with some of our key clients and their brokers to investigate and test these materials because facts will make the difference.”

And he believes collaboration is also the answer to the repurposing problem, encouraging clients and their brokers to come to AXA much earlier in the design process to understand what their ambitions are which will, in turn, allow underwriters to support those ambitions as much as possible.

“Brokers and insurers need to stop being so territorial in all of this,” he says.

“We need to work together and try to make it more seamless for the client. Everyone has to take a step back to understand how we do this together.

“Developments will happen even without this collaboration, but if they do, we may end up in a vicious cycle with clients not happy with the terms offered and insurers not happy that they are being brought in at the last minute.

“But together, we can work to get a design and construction that they like and that we can provide more sustainable terms on.”

The real estate sector has the willingness and the means to meet the challenges of a post-Covid economy, but their success is entirely dependent upon that same willingness existing in the insurance sector.

According to Bailey, it certainly exists – it just needs greater and earlier engagement from the broking community to ensure that it works for everyone concerned.

“I would urge brokers and clients to use our proposition across claims, risk management and all the added value services AXA can provide,” says Bailey.

“Test us, utilise us. If it is something that we haven’t done before, ask us as we often go the extra mile to accommodate new requirements. But ultimately, I would urge every party to not stick to their own territory– let’s work together and bring all our skills to bear for the client.”