There was a telling piece of information in the latest trading update from UK property investor British Land (BLND). Faced with a situation where Facebook-owner Meta Platforms (META:NASDAQ) had decided break its lease on 1 Triton Square on British Land’s Regent’s Place ‘campus’ (at a cost to the social media giant of £149 million), the latter felt confident enough to reject Meta’s offer of an occupier to take the lease.

Instead, the company felt there was more value in taking the office back and reletting it – with conviction it would be able to do so at higher rates. There is no doubt the working lives of office dwellers has changed dramatically since the pandemic. Forced to stay at home due to Covid restrictions, workers found they rather liked having a better work/life balance as they avoided spending ages getting to and from the office.

While some organisations have really pushed to get people back at their desks, most seem to have settled on a hybrid model with workers spending a mix of days in the office and at home. There has also been a pronounced shift to hot-desking – with staff no longer guaranteed their own reserved spot.

These trends have been particularly marked in the UK. According to a Morgan Stanley ‘AlphaWise’ survey, the UK has seen the largest increase in home working with just 30% of respondents working a full week in the office versus 63% pre-Covid and the average number of days per week worked from home doubling from one to two.

Therefore, if businesses want to get people into the office they need to make them appealing places to be and ensure they are in the right locations. Other big considerations are sustainability – as tenants want to ensure they are future-proofed against more stringent environmental regulations – and flexibility to enable space to be used in different ways.

As the Morgan Stanley analysts comment: ‘While the AlphaWise survey shows work from home and hot-desking headwinds are more embedded in the UK office market than in Europe and even the US, the confirmation of a gravitation towards city centres and amenity-rich buildings plays into the central London operators’ hands, particularly when you consider the disproportionate level of tenant demand for green and modern buildings, which is what the listed London office landlords own.’

Other companies which have material exposure to London offices include Land Securities (LAND), Shaftesbury Capital (SHC) and Derwent London (DLN). It is notable that their discounts are significantly narrower than that endured by Regional REIT (RGL). British Land’s is around 40%, for example, while Regional REIT’s approaches 60%.

As its name suggests Regional REIT owns and manages regional offices, an area neglected by investors since the financial crisis but which is performing well despite the market’s reservations.

Aside from good occupier demand, there is a strong and growing market in alternate use with the firm recently selling a Glasgow office block to a buyer in the student accommodation sector for a 24% premium to its most recent valuation.

Disclaimer: The editor of this article (Ian Conway) owns shares in Regional REIT

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