At the 2019 ULI U.K. National Conference, a panel on the practicalities of real estate investment reflected on the opportunities and challenges, not least in terms of the impact that Brexit is having on investor sentiment, as well as where we are in the market cycle. Multifamily continues to do well, while retail is struggling as in other markets.

Laure Duhot, head of investment and capital markets, Europe, at Lendlease admitted straight away that she was in a slightly different position to the rest of the panel given that her company concentrates on long-term development plays. “Lendlease looks at investment upstream as a developer,” she said.

“We tend to do 10- to 15-year projects and we always invest selectively, both in terms of our money and our partners’. That means that when we are at the top of the cycle, we can still commit money to schemes. Also, we have control over delivery, so we can time it depending on the market. It also means that we are well positioned to invest when there is less competition.”

Baupost Group International’s managing director, Hunt Doering, added that he too is still investing, despite the fact that the market is at a late stage in the cycle. “We invest throughout the cycle,” he said. “If we see anything we like, we buy it and we invest across asset classes, as well as non–real estate. We were active last year, which surprised me—we started out thinking that it would be slow, but we found some interesting things.”

While there was some debate about where the market is in the cycle, there was broad agreement that investors are having to accept that they are having to become more involved in their assets at an operational level.

“If you’re talking retail, operational risk in inherent—tenant churn is embedded,” said Andrea Orlandi, managing director, head of real estate investments, Europe, at Canada Pension Plan Investment Board. “But it’s the same WeWork in offices. There is just more operating risk out there, so you have to embrace it.”

Eleanor Jukes, senior strategist at Legal & General Investment Management, agreed. “It’s about sharing risk and making sure you are more aligned with your occupiers,” she said. “That means doing things like more flexible leasing. That’s where the market is going.”

It was a trend that nobody thought would go away any time soon. “It’s a fact of life for anyone investing in real estate,” said Edward M. Siskind, founder and CEO, Cale Street Partners. “The days of stable income and long leases are behind us. We need to operate in a more efficient way. I’m not 100 percent of that view, though—sometimes we move into operational assets when nonoperational assets are priced to perfection.”

There was also strong agreement about London’s ongoing value as a solid investment location, despite the headwinds from Brexit. “Brexit is bad, but the fundamentals of the London market are still there in terms of transparency and liquidity,” said Jukes. “There are more people in skilled employment than there are in Paris and Frankfurt combined.”

Orlandi added: “London has such a lead when it comes to things like infrastructure, the ease of doing business, and human capital. We’ve invested in retail, offices, and student accommodation in Birmingham and maybe we will do more. But the focus has gone back to London—arguably, the pendulum has shifted.”

For his part, Doering said that secondary markets could be attractive depending on the point in the cycle, but that capital would always return to tried-and-tested markets. “Those other markets [get attention] mid- to late cycle when people can’t find the yield in London and Paris and so on,” he said. “But money always pulls out quickly. So, you really need to ensure it’s the right asset because of the lack of liquidity—you need to be able to hold it for 10 years.”

In terms of sectors, the panel was particularly keen on build-to-rent, which in a short few years has gone from being something of an untested oddity in the United Kingdom to a hot ticket. “In the U.K., it was totally new and when we came to it in 2012, we were pioneers,” said Duhot. “There was a real demand from renters. Suddenly, the sector started kicking off.”

According to Jukes, the current trend is something of a correction after several decades when the focus was almost exclusively on build-to-sell residential. “We have always been renters—now it’s ticking back,” she said. “People traveled to the U.S. and Europe and asked why we weren’t doing it here. We haven’t quite got the amenities right yet—in Chicago there is a real concierge approach.”

Orlandi agreed that build-to-rent’s time has arrived, but argued that it had happened by accident as much as by design. “We’ve got to have the right answer, but that’s because there was a slowdown in the residential market,” he said. “We have arrived at the right place, but it was because developers couldn’t sell their stock.”

Finally, the panel turned its attention to retail, which, safe to say, has fallen out of favor with investors in recent years, largely due to the rise of online shopping. However, while Siskind did not deny that retail is facing severe challenges, he added that the problem could be overstated. “We’ve just bought a retail center,” he said.

“There was a multiplicity of factors. We don’t believe that people are just going to stop going to shops. Online will be a part of it, but that isn’t a retail experience. Going shopping will still be a substantial part of retail, but changes are needed to make it more exciting and appealing. You also need to be very selective.”

Doering concluded: “Selection is incredibly important. We’re known as distressed buyers, but we’re really scratching our heads. We don’t own any U.K. retail. This is a fundamental shift. The amount of excess space is significant—in 20 years from now, 20 percent to 40 percent will be dark. I don’t think it is possible for all of it to survive.”