London office property market likely to see structural changes
Shift to work-from-home due to pandemic will affect adversely valuations, rents of office and retail buildings
London
COVID-19 is likely to bring about structural changes in the London and UK commercial property market for years to come.
Unsurprisingly the virus' impact is currently negative for both retail and office sectors, but logistics, warehouse property is the beneficiary of accelerating e-commerce.
PricewaterhouseCoopers which employs 22,000 staff and Schroders, the asset manager with 5,000 employees, announced that the majority of their staff can continue to work from home when the epidemic comes to an end. Other firms that have agreed to changes in working circumstances include the broker Numis, Standard Life Aberdeen, NatWest Group, Barclays and JP Morgan.
The move towards more homeworking had already begun before the virus, but zooming and other remote conference calling, selling and interviewing, have accelerated and are becoming permanent.
This shift in office-based culture is not only denting expected valuations of office buildings and rents, estate agents say, but there are also negative results and prospects for the landlords of struggling retailers, coffee shops, pubs and other small businesses. Despite the relaxation of lockdown, surveys indicated that only 34 per cent of workers have returned to London, Manchester, Birmingham, Leeds, Bournemouth and other cities. Thus, these struggling retail businesses are experiencing a slump in office workers' consumption.
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"Stay at home working is a big problem for central London," Sadiq Khan, London mayor said. "Many small businesses rely on workers going to work, the cafes, bars, the dry cleaners, the shoe repair shops and others."
These trends are expected to continue for at least a year or two. In the meantime, architects, developers, pension and other investors are grappling with ideas on how to change vacant space into workable profitable properties.
Ideas need to be put into place swiftly as Covid-19 has caused a crisis in both the office and retail property sector, CBRE, an international commercial real estate agent and consultant, said in a report. Indeed, several developers are already studying best ways to convert some offices to apartments.
According Deloitte Real Estate, new office construction surged in London between October 2019 and March 2020. Sixteen new developments in the City, London's financial district, will add 2.8 million square feet of new or refurbished offices.
The West End also has 12 new construction sites totalling 550,000 square feet; Southbank seven new starts, amounting to 560,000 sq ft and there has been planning consent for 1.2 million sq ft of redevelopment beside Waterloo Station. Other areas include Paddington with a further 425,000 square feet.
Knight Frank, an estate agent, estimates that the availability of space totalled 14.24 million sq ft in London in the second quarter of this year, but the "take up", that is amount let, has slumped by 59 per cent. Moreover, supplies will eventually rise further as property under construction amounts to 13.84 million sq ft. There is some respite for present office landlords, however, as Covid has delayed completion of new buildings.
The wide supply surplus over demand indicates that major commercial property owners are likely to experience a slump in values and rents in the next year or two, economists believe. Banks and financial institutions that lent and issued bonds to finance the developments could incur losses, they caution.
It is difficult to gauge the extent of commercial property, especially retail price falls. Capital Economics, a consultant, predicts a 9.4 per cent decline in average values this year and a 10 per cent fall in rents, but warns that the slide could be steeper.
As an illustration of anecdotal reports, an investor who declined to be named decided to accept a 16 per cent price reduction in the sale of a retail property.
The shift towards online purchases has been hurting the high street and retail shopping malls for some time. This week Marks & Spencer announced that 7,000 employees would lose jobs. John Lewis is shutting eight of its 50 department stores to save costs, including a sprawling 250,000 sq ft site in the centre of Birmingham.
Sharon White, chairman of John Lewis, has outlined a radical plan to save the business. The aim is for online selling to increase to 60 per cent of total sales and more products will be sold through Waitrose, the partnership's grocery stores. Garden centres will open and stores will be turned into affordable housing, Ms White said. The transformation of large five- floor department stores into apartments will be an architectural challenge because natural light is only in the front and rear of the properties.
In contrast, Richard Jewson, chairman of Tritax Big Box REIT, which specialises in Amazon warehouses and other logistics property in the UK and in continental Europe, said that the company performed well during the first half of the year.
"There have been high levels of rent collection, stable earnings and an increase in portfolio value and rents driven by effective asset management and development activity," he said. Despite that, the Reit cut its quarterly dividend as "the board wishes to preserve the financial strength of the company".
JLL, the international real estate firm, calculated that commercial property investment in the UK in 2019 fell to £50.3 billion (S$90.7 billion), down from £64 billion in 2018 and £65 billion in 2017. Anecdotal reports indicate that a further decline is inevitable this year. But some Canadian and other investors are taking a long term view and are purchasing cheap properties.
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