Landlords' post-virus refit will leave scars

London

SPRUCING up a run-down property is a quick way to add value, and that is what landlords are banking on in 2021, as Amazon buys defunct malls and more offices turn into flats.

It could boost valuations in the US$33 trillion global commercial property market. Even so, assets will still be worth less than what they were five years ago.

Demand for office space has plummeted to a record low, said London's Great Portland Estates.

The landlord's stock declined 25 per cent since the beginning of 2020, as companies from Twitter to BP and PwC embrace a future where working from home is the norm.

Shopping malls are in a worse predicament. Retail titans like Arcadia, owner of Britain's Topshop, and JC Penney in the United States have collapsed amid the pandemic.

The e-commerce boom that has eviscerated the high street is only likely to intensify. Moody's reckons that the proportion of online sales will leap to 25 per cent by 2025, from around 15 per cent currently.

Luckily, Amazon is crying out for warehouse space. The US$1.6 trillion retail giant could aim for 50 per cent of US online sales in 2021, said investment bank Needham.

Refurbishment costs are minimal as shopping malls have enough headspace to accommodate delivery trucks.

Landlords will still get burned, though. Five years ago the typical yield on UK shopping malls was 4 per cent. Asset value slumps in 2020 mean this is now more like 7 per cent, said estate agent Savills.

For a building with £1 million (S$1.80 million) of annual rent this sort of yield shift is the difference between a property being worth £25 million and £14 million - a 44 per cent drop.

Prevailing yields on warehouses are 6.5 per cent, which is not enough to get values back where they were.

Repurposing offices is also tricky. Turning BP's recently flogged headquarters in central London into posh apartments is an obvious move.

But a shortage of affordable housing means councils may not grant planning permission for luxury flat conversions.

Cheap apartments may attract as little as £2 per square foot in rent, according to Knight Frank - a far cry from the £100 per square foot level for top-tier offices.

Real estate kings should prepare for lasting scars ahead. REUTERS