Until recently, rock-bottom interest rates and ample liquidity underpinned the UK commercial real estate market, making it relatively resilient to adverse macro-economic forces compared to other sectors.
Rebuilding commercial real estate for the ‘new normal’
The challenges posed by post-Brexit market volatility, mounting regulatory and tax pressures, rising costs and increasingly exacting customer demands mean that the Coronavirus (COVID-19) pandemic could not have come at a worse time for the sector.
The pandemic has weighed on businesses across the sector
In the retail space, many tenants who are locked into inflexible long-term leases have struggled to pay their business rents on time – or in some cases, at all – leaving them trapped in an impasse with landlords. At the same time, many high-street names have been hit hard by the huge drop in footfall created by the lockdown restrictions, with several entering administration.
In the office segment, workers have shown their resilience by adapting well to remote working, with some of the nation’s biggest employers even announcing plans to let their staff work from home indefinitely.
In the hospitality and leisure sector, trips to pubs, restaurants and hotels have become a ‘luxury’ as cautious consumers watch their spending and lockdown measures have seen many businesses become casualties of the crisis.
Meanwhile, in the construction industry, development projects have been put on hold or cancelled altogether, and social distancing rules have made it impossible for busy construction sites to operate as normal. With the cranes and the wrecking balls falling still around the UK, the ongoing crisis has dealt a serious hammer blow to the construction industry’s output – and to the jobs that underpin it.
On the retail front, both tenants and landlords will need to explore new, more pragmatic ways of working together if they are to resolve the current stalemate over business rents, including the possibility of calculating rents based on tenants’ profits in future. Meanwhile, consumers continue to shift towards buying online, leading some retailers to switch to an online-only model with no physical bricks-and-mortar presence on the high street. While this transition was already well underway, the impact of COVID-19 looks likely to accelerate this trend.
As the lockdown is lifted, venues right across the hospitality and leisure segment will be questioning whether customers will now return in sufficient numbers to make their businesses viable over the longer term as the lockdown lifts.
Meanwhile, in the office sector, while working from home has now become the rule, rather than the exception, some companies are actively bringing employees back into the workplace. This return to the office is likely to spark a grassroots review of old working arrangements, underscored by debate over whether existing office space needs to be scaled down, radically changed, or scrapped altogether.
Investment in commercial real estate will also be affected by the fallout of the pandemic. In recent years, institutional investors have piled into the sector, attracted by its stable returns and its perceived status as a ‘safe haven’ asset class. But the future path of returns is impossible to predict, and institutional investors will need to be nimble enough to seek out opportunities at a local, rather than a national, basis. This shift could push out the larger funds looking for stable, reliable income from their investments, as well as making it challenging to accurately value commercial real estate assets in the short to medium term.
How we can help
Our real estate sector team specialises in areas including:
Recent projects include advising on the sale of online property management platform Urban.co.uk to Howsy, leading a refinancing deal to safeguard the Liverpool Docks development project and spearheading a restructuring deal to rescue Bradford City Centre development project.
Click here to read an interesting article on the impact of COVID-19 on the UK construction sector by Graham Randall, Quantuma restructuring and insolvency partner, featured on the Construction & Civil Engineering website.