Commercial property is one sector that is undergoing profound change. Once a trusty and reliable source of investment diversification and income for investors, the last few years have taken their toll.
Traditionally, commercial property promised stability, inflation adjusted yields and a safe investment space compared with the volatility of the bond market. But recently there have been a number of significant challenges facing the sector.
From the impact of Brexit to the pre-pandemic fall in high street retail, to the COVID-19 lockdowns and uncertainty surrounding commercial office space, the sector is far from stable right now. This, of course, does not mean that investing in commercial property is dead. It just means that investors need to readjust expectations and investment decisions.
What does the future really look like for the commercial property market?
On the surface the commercial property market looks bleak as we reach month 14 of the global pandemic that has taken such a massive toll on the way people live, shop and work.
However, the truth is it’s much more nuanced than it appears. Industrial remains strong and there are opportunities within retail too. Certain retail sub-sectors, such as convenience stores and supermarkets, are performing well during the pandemic. Others, such as the former prime space of fashion and luxury goods are struggling.
The sharp growth trajectory of e-commerce, which let’s remember, was already strong before the pandemic, is pushing industrial and logistical commercial property. Warehouses, delivery hubs and other industrial sites are taking off in a big way as brands move to meet the consumer demand.
As we continue through what will prove, hopefully, to be the pandemic’s final stages, we’ll see logistics continue to grow as a commercial subsector. Both the impact of Brexit on exporting and importing, and the rise in online shopping, is forcing companies to reorganise their supply chains. More brands will need storage within the UK to avoid as much disruption as possible.
The future of commercial office space is far from certain
Remote working has become a permanent feature for millions of people since the pandemic started. The outlook for commercial office property remains hazy right now. Some major companies, such as HSBC, have already announced that they will be slashing office space by around 40% to allow what they call “a very different style of working post-COVID.”
However, other such as Goldman Sachs have made it clear that they consider remote working as a temporary stopgap until people can safely return to their office. Currently it’s not possible to predict with any certainty how this will play out for this previously dependable subsector.
Landlords are trying to work their way through the uncertainty caused by the pandemic, while workers may well insist on continuing to work remotely. Either way, there is a lot of uncertainty surrounding supply and demand. There may eventually be a change in favour of office property investors – if employees come back but demand more space to comply with social distancing, then this could reverse the current trend.
Commercial property has been through resets and readjustments before. It’s important that investors don’t try to take a short-term view of a long-term asset class. Many commercial landlords are protected by long-term leases and have found ways to renegotiate with tenants.
Asset managers must look ahead and focus on the future of this asset class. Both landlords and tenants are looking for substantial policy reform to allow for the commercial property sector to adapt to changing demographics and consumer demand.
Challenges facing commercial landlords due to potential legislative changes
Commercial landlords have, of course, been dealing with a lot of uncertainty during the pandemic. The Government’s actions to support business tenants has caused concern for the sector and led to a certain feeling of imbalance between the landlord/tenant relationship.
It’s important though not to overplay the challenges faced by commercial property landlords. All legislation in place for the pandemic is temporary, but this is impacting a sector that is traditionally driven by sentiment. Extended lockdowns have put the perceived imbalance between tenants and landlords under the spotlight with many tenants simply unable or unwilling to pay rent during the pandemic.
For example, when Travelodge refused to pay rent during the first lockdown, this was taken up by a group of landlords led by Nick Leslau. There was a sense that the large chain was taking advantage of the pandemic to withhold rent that it could and should have paid. Travelodge is just one of many corporate tenants who have taken this approach.
This, combined with the potential threat of Company Voluntary Arrangements (CVA) for landlords has driven negative sentiment. A number of high-street tenants and occupiers have shifted into administration over the last year, including major brands like Mothercare.
While the Government has been focused on trying to keep businesses going and retaining jobs, the commercial property market has had little to no assistance. If we contrast this with other countries, such as Denmark where measures were put in place to share the economic burden between the Government, tenants and the landlords, it’s easy to see why some commercial landlords are struggling with immediate cashflow.
The future of the commercial property sector is vital for economic recover
The UK Government is putting in place a Code of Practice for commercial property. This will focus support on high street tenants and landlords, and it’s hoped that the Code will bring clarity over rent payments. According to the Government, the Code enables collaboration and cooperation within the commercial property sector.
There may well be long-term repercussions for tenants who haven’t been able to get their usual income streams. And it shouldn’t be forgotten that many property investors represent a major lifeline for charities, pensioners and Government bodies. In other words, while they may be limited sympathy for what many assume to be ‘fat cats’, this is far from the case in many circumstances.
What does seem likely, however, is that we will see some changes to the business tenancies that underpin the investment market. How this will play out for investors and landlords remains to be seen but we can expect resistance to changes that are mostly in favour of tenants.
Either way, the most important aspect of the future of the commercial property sector in the UK is the Government’s approach to it. Any changes that are made, whether they evolve from the pandemic crisis or due to Brexit, must be balanced and fair. Inf act, balance is the most essential element here, and is vital for any future success for the commercial landlord/tenant business relationship.
The commercial property sector in the UK is integral to the country’s economic success, and the focus will now be to build back its reputation as an overseas investor hotspot.