After the past few years of uncertainty and debate surrounding Brexit, we’re now living in the new reality. Not only are we still absorbing the impact of the pandemic in the UK and at a global level, we are officially operating apart from the European Union.
That’s a lot of change. And a lot of division. So, what does it mean for the commercial real estate sector in the near future and for the long term?
How Brexit and the pandemic put the pressure on commercial real estate
Along with Brexit and the pandemic, we are now well into a period of relatively stable political leadership. This means we can look to the future with some certainty surrounding what’s coming. COVID-19 will continue to impact every real estate sub-sector throughout 2021. Reductions in rent and overall value will be the main impact, with short-term losses unavoidable in most cases.
However, some subsectors of real estate have seen growth. These are mostly within commercial real estate and include warehousing and logistics. The pandemic has accelerated real estate trends that were already growing at a pace. These include things like the shift towards remote working and consumers increasingly online shopping.
COVID-19 pushed these both to the forefront of our daily lives, and this has had a corresponding impact on commercial real estate. The domestication of supply chains has also been accelerated due to Brexit, with an inward focus on increasing the UK’s manufacturing and independence.
Overall, the year 2021 is heralding many new outlooks and a new beginning. Not just for commercial real estate, but for the way we all consider how and where we work, where we shop and adjust to post-pandemic changes. Change does mean uncertainty, as we all know by know. But it also brings immense opportunity.
Economic recovery will be driven by consumer spending
The UK has now been through two major, long-term national lockdowns. At the time of writing, the country is just starting to unfurl and reopen but there’s still a long way to go before all businesses across all sectors are operating as they want to. There is likely to be a strong consumer-driven economic recovery driven by a sharp increase in retail.
Consumers have been locked down and frustrated for a long time, and with the reopening of physical retail outlets there will be a surge in spending. Retail is already recovering, and this will continue apace particularly as the vaccination rollouts continue to do so well.
The combination of continued fiscal stimulus, along with low inflation and interest rates will all work together towards recovery. So, while commercial and residential real estate will most likely have a steady and subdued 2021, there is likely to be a strong medium to long-term recovery.
Office space take-up will obviously have a major impact on commercial real estate. And while it will stay low in 2021, there are a number of sectors outperforming expectations. These include life sciences and equity targeting for the important office market in Central London is rising. This will continue to drive a reasonable recovery as investor uncertainties continue to fade.
Throughout 2021, we will see the continued occurrence of flexible working, with office workers most likely to end up combining some at home and in office days. However, with the Chancellor and other major figures calling on employers to get employees back into the office this could change.
There is a balancing act to achieve for employers and commercial real estate landlords – of ensuring everyone is safe and returning to a working pattern that is as close to ‘normal’ as possible. This isn’t just for economic concerns. There is evidence to show that the isolation of remote working isn’t conducive to the creativity and free flow of ideas that many sectors need from their employees.
The UK’s retail sector is undergoing fundamental changes
Within commercial real estate, the retail subsector is the one likely to need the most drastic changes. COVID-19 decimated an already weak high street suffering from very high costs and ever-increasing pressure from online retail.
Of course, there are some elements that have proven resilient, and this will continue. These include supermarkets and warehouses, driven by consumer demand for easy access to necessities and online purchases.
Outside of these thriving subsectors, the British high street is going to have to radically alter its base offering to survive. We’re most likely to see mixed use of buildings and the repositioning of many assets towards a new urban centre. This will help to ease the housing shortage, as people move into urban centres that were previously the sole domain of retail.
And with the hospitality sector set to come roaring back during the summer, this will further boost the attraction of living in new developments near to city centres and amenities.
Why logistics and warehousing will continue to thrive
Turning to the logistics sector, we will see a continued growth of the already buoyant sector. This is, of course, partly down to the impact of COVID-19 on consumer habits. There will be no return to predominantly offline retail for the majority of consumers. And as there is a strong consumer demand and relatively weak supply of warehousing and logistics space, this will drive rents up.
This will particularly impact the property located in semi-urban locations, within easy reach of a lot of consumers. We are likely to see an uptick in less specialised commercial property investors moving into this space, which will likely include joint ventures and through mergers & acquisitions.
While I expect hospitality to do well just as soon the doors are allowed to open, it’s been a long hard battle for this sector. Hotels and hospitality in general have been battered by the pandemic and it has forced urgent pivoting and flexibility from business owners. The kind of innovation we’ve been experiencing within this sector will continue as it continues to adapt to the current economic conditions. And this will mean ever more creative use of real estate – it’s about efficiency and collaboration.
What political events will impact commercial real estate in 2021?
While there will be no UK general election in 2021, there are other political components that will impact commercial and residential real estate. These include:
- Scottish Independence
In May 2021, the Scots will vote on changes to Scottish Parliament. While there is plenty of uncertainty and mixed messages, it looks like there is significant support for Scottish independence. There is also a relatively high level of support for the way the Scottish Government has handled the pandemic, which could see some powers shifted there.
- Tax changes and business rates in England
It’s likely that there will be further increases in Capital Gains Tax (CGT) and more Government support for the high street.
- Significant changes to planning law and land use
The UK Government wants to radically change the planning system in terms of land use, which could open the door to widespread development and major changes to local powers.
Investor uncertainty will continue to fade throughout 2021
Uncertainty still rules the day for now. But we can also see high levels of collaboration and innovation leading to a different future for some commercial subsectors.
While commercial office space will continue to adapt to changing demand, hospitality and hotels have packed in years of innovative business strategy since the pandemic started. For example, landlords have linked up with tenants to release facilities for other purposes, and businesses have continued even under the ever-changing constraints.
This is becoming a profound and permanent shift for the hospitality, hotel and pub sector. Many institutional investors are now directly funding tenant’s businesses – a symbiotic support system that benefits everyone. We will see more new forms of collaborative investment as recovery continues.
In the short-term then, we will continue to see suppressed commercial real estate investment in some areas. Others will build on the success they have garnered since the pandemic and continue to thrive. In the medium to long-term, we will see rapid increase within commercial property investment, albeit in differing strategic forms.
| Eddie Kerman is Investment Director at London-based Pelican Partners, a real estate and private equity investment firm. |
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