Of all the consequences of the pandemic, one of the most impactful on day-to-day life is that human beings are spending their time in different physical locations than they used to. At its simplest level, real estate exists to facilitate human endeavour, and so this rapid change in where people spend their time has deep implications for an industry where assets have been developed envisaging stable long-term demand.
It is almost a year since firms sent staff home, as the COVID pandemic began to spread more widely in the UK. Many haven't been back to our cities since - and we don’t yet know how many will return when the oft-quoted "new normal" appears. For example, a recent report has suggested that London may be set for its first population decline since 1988 - this appears to be an early indicator of the some of the shifts we are about to see.
It is likely that an increasingly suburban workforce will spend less time in town centre offices, resulting in a major shift in the UK real estate landscape, and that residential and office trends will have further implications for already challenged hospitality, retail and leisure locations.
Lockdowns have had a sustained impact on commercial tenants, particularly retailers and travel, hospitality and leisure businesses.
For landlords, the accelerated degeneration of the high street has been painful - for the December 2020 rent quarter, British Land and Land Securities, two national commercial landlords, reported rent collection rates for retail property of just 46% and 36%, respectively. Many retail and commercial properties now lie empty, with the prospect of a full recovery appearing bleak.
Will the pain to spread to the office sector?
These same landlords will have been encouraged by the performance of their office portfolios in the same period, reporting office rent collections of 95% and 96% as businesses continue to pay rents on space they are not using.
But beneath the surface, a storm appears to be brewing. Corporates are anticipating long-term changes to working practices that would see staff spending less time in the office. The result could be a sustained decline in demand and pricing as supply/demand dynamics take effect.
Where do opportunities lie?
The shift toward home-working has created opportunities elsewhere. There have been numerous reports of a residential property boom in suburban locations as city workers seek more space. The continued rise of online retail has also further underpinned a scramble for prime warehousing and logistics property, where valuations indicate that this demand will be permanent.
The need to assess and plan, now
The above factors contribute to a complex and unpredictable outlook, one that real estate businesses will need to be aware of when assessing the sustainability of their financing structures. In challenging and unpredictable times, it will be important to retain the support of financial stakeholders by communicating very clear strategic objectives and managing their liquidity tightly.
In the table below, we share our views on the key sub-sectors within real estate. Over the coming weeks, we’ll consider some of these sub-sectors in more detail.