UK & European PERE: what is in store for 2022?

The Beatles famously sang about “A Hard Day’s Night” and in 2021, for us transactional lawyers, it certainly felt like that at times except we were also joining Dolly Parton in working “9 to 5” too.

Activity levels across many real estate sectors proliferated with investments in ‘Beds, Sheds and Meds’ being centre stage and which comprised the majority of our transactional activity at Ropes & Gray.

So what does 2022 hold in store? We’ve sketched out a few thoughts below on where we see the activity coming from and some highlights to watch out for. We would like to hear your thoughts on whether you agree or have other predictions for the year ahead.

Logistics and light industrial 

Investment activity in the logistics sector continues to grow apace and the signs are very much that this will continue through 2022, supported by an extremely robust occupational market. Global capital in the UK and European markets will continue to dominate this sector. The breadth of online retail consumption, the increasing trend to home-working and the associated socio-demographic habits that flow have fueled a surge in demand and yield compression because of the sheer weight of capital, amid material supply constraint. Expect to see more opportunistic repositioning and development opportunities in the sector, throughout both the UK and continental Europe, as the year progresses.

OpCo investments

Among real estate capital partners we are seeing a growing trend of making equity investments into real estate operating companies and managers. We expect that these types of Opco investments will grow even more popular among PERE investors of all risk profiles and size. The reason?  They are seeking to get ahead of the race to scale and secure first offers and deal exclusivity with the most successful operators, most often through meaningful minority equity positions in their businesses, alongside an underlying seed acquisition for the combined platform. Data centres and life sciences could be key sectors to watch for this tactical investment shift as 2022 progresses.

Real estate life sciences 

2021 saw the popularity of real estate life science investments continue to skyrocket.  There is a wall of capital targeting real estate life sciences from a broad spectrum of investors attracted by the strong post-pandemic fundamentals that underpin the sector. In 2022, we expect to see investors continue to target this sector focusing on the existing and emerging UK and European clusters for science and technology, including the ‘Golden Triangle’ of London, Oxford and Cambridge.  Given the relative shortage of stock compared to other asset classes, we expect to see the conversion of existing office and retail assets to lab-enabled uses and joint venture development partnerships with universities and public sector bodies.

Real estate special situations / distress

Many predicted publicly that we would see distress permeating the real estate market in the late part of 2020 and early 2021. That did not happen on the scale that many PERE investors anticipated. In the second half of 2021 we started to see our opportunity-led clients focus on more special situations, the vast majority of which are real estate led opportunities. As we progress into 2022, we anticipate that we will see an increasing number of real estate special situations coming to the market, particularly in the hotel, hospitality and retail sectors. This will only increase as we progress towards the end of one of the longest economic cycles in living memory.

Legal developments 

So what’s on the horizon in terms of UK legal developments? A few highlights to watch out for:

• Expect clarity for landlords and tenants on pandemic-related rent arrears. The measures introduced to assist commercial tenants in 2020 and 2021 did not stop landlords from commencing proceedings limited to claiming arrears of rent from a tenant or guarantor and, in 2020 and 2021, we saw landlords issuing debt claims successfully. Appeals in some of these cases are due in 2022. Some tenants are requesting proceedings be stayed pending the Commercial Rent (Coronavirus) Bill 2021-22 being enacted, which will force binding arbitration for pandemic-related commercial rent arrears. The rent arrears story will continue to unfold. 
• Keep an eye on the landlords' appeal in Lazari Properties 2 Ltd and others v New Look Retailers Ltd and others [2021] EWHC 1209 (Ch). A sticky wicket for landlords in recent years has been the rise in the use of company voluntary arrangements (CVAs) by retail tenants. In Lazari, the High Court dismissed a challenge brought by landlord creditors to the CVA that was approved for New Look. The landlords argued that the CVA should be set aside on the grounds of unfair prejudice and material irregularity and because it had effects that were beyond the limits of what CVAs were intended for. The judgment was an important one on the perceived injustice to landlords with the use of CVAs to limit property liabilities. An appeal is slated for early March.
• The Building Safety Bill 2021-22 will be a key milestone for various stakeholders in the real estate industry with its wide-ranging reforms in relation to development liabilities not least the hot topic of cladding. Expect fire safety and cladding matters to become more litigious going forward.