Real Estate Market & Covid-19 - Weathering the Storm?

16th April 2020 Real Estate Commercial

Just when we thought we were away from the turmoil of Brexit; we find ourselves in the eye of another storm. This storm is Covid-19 and it is wreaking havoc and causing devastation on a global scale.

In the short-term, we are facing a hard and deep shock (stock markets have fallen, and businesses are shutting down). The UK is in lockdown and we currently have no idea when this will end. Whilst the Government has put in place a raft of measures aimed at shoring up the economy, will these go far enough? Early sentiment of a swift rebound in the global economy (following successful containment of the virus) is giving way to a fear of a protracted period of disruption with the potential for a slower, harder recovery.

Investment Activity

Investment activity will undoubtedly slow down in H1 as investors react to uncertainty. That said, opportunistic purchasers are expected to take advantage of the period of inevitably reduced liquidity.

Some sectors will be hit worse than others and we can see the devastation wreaked by Covid-19 in some sectors already, most notably retail, leisure, hotels & hospitality. Whilst anything more than short-term prediction is difficult, for now we are already seeing a shift in appetite to more “defensive” assets (those with income stability and occupation density).

Key Sectors – How are the performing?

Retail

Retail has been a struggling sector for some time, and this has been exacerbated by lockdown and store closures. We have already seen household names like Brighthouse and Laura Ashley go into administration following the outbreak of Covid-19 and there will no doubt be others.

Food deliveries and e-commerce are thriving but will be dependent on a resilient supply chain.

There has been a rise in sales at supermarkets. Last week Tesco announced an increase in sales by 30% in the first few weeks of the Covid-19 outbreak as shoppers stockpiled before the lockdown. Whilst sales are at unprecedented levels, operating costs have also increased with 45,000 new staff having to be hired to keep its stores and distribution centres running and it remains to be seen whether and to what extent Covid-19 will result in an overall improved financial performance for the supermarket giant.

Hotels & Hospitality

The impact of travel restrictions, event cancellations and lockdown have resulted in a significant reduction in demand. The magnitude of the impact will depend on the duration of the pandemic and the success of the Government’s support measures, but many businesses will struggle to survive, and we are already seeing casualties. Restaurant chain Carluccios has fallen into administration blaming tough trading conditions made worse by the coronavirus pandemic. Undoubtedly, there will be more casualties over the coming weeks as lockdown and enforced closures continue.

Industrial & Logistics

Whilst there are severe disruptions to supply chains causing supply shortages and this will likely see a shift towards re-shoring or near sourcing of manufacturing, a move to online shopping and especially for groceries is likely to boost demand for logistics space.

Offices

Office utilisation rates have fallen as remote working has increased, and early commentary is that landlords with exposure to short-terms leases are the most vulnerable. In the longer term, enforced experience of remote working is also likely to accelerate a trend towards more flexible and agile working and, potentially, in the post Covid-19 world businesses seeking new office accommodation may require less space.

What is the data telling us?

The CBRE Monthly Index (which gives the first real-time glimpse into the impact of Covid-19 on UK real estate valuations) has confirmed that capital values fell by 3% across all commercial property in March. CBRE commentary was that “monthly falls of this magnitude are extremely rare, unprecedented outside of the global financial crisis and the immediate aftermath of the Brexit vote in 2016”.

Retail took the biggest hit with values falling by 5.1% over the month. Rental values were also down by 0.7%. Office capital values fell by 1.6% though rental growth remained positive at 0.1%. Industrial capital values fell 1.6% while rental values increased 0.1%.

In terms of rent collections, less than half the rent due on the March quarter day was paid on the day. A survey across more than 18,350 properties undertaken by Remit Consulting (and shared exclusively with Property Week) offers the most detailed picture yet of the impact of the Covid-19 outbreak on rent collections. Just 48% of rent due was paid on the due date, increasing to 57% seven days later. The equivalent figures for last year were 79% and 90% respectively according to Remit’s 2019 REMark report.

Rates of service charge collection are even weaker. Just 38% was collected on the rent quarter day, rising to 48% seven days later. Figures for last year were 73% and 80% respectively. Property managers are said to be very concerned by these low levels which will make it harder to keep up with the costs of running buildings.

The rent collection statistics may go one of 2 ways over the following quarter. They may increase from tenants moving to monthly payments or they may go down further as the financial impact of Covid-19 worsens.

Covid-19 and longer-term change in Real Estate?

Changes to Real Estate in a post Covid-19 world could include:

  • Remote working – likely to become a more permanent feature of our lives.
  • More integrated technology- necessitated by higher levels of people working from home.
  • More online shopping (particularly grocery shopping) - will impact on how retailers operate creating a higher demand for warehousing space.
  • Sustainability improvements- with more people working from home and, following a period of use of conference facilities, there is likely to be less commuting and corporate travel.

Whilst we can comment on the immediate and direct effects of Covid-19 on Real Estate, the longer term and indirect effects are yet to be realised. Those countries and cities which are worst hit will feel the direct effects hardest but everywhere will feel the indirect effects, be it in the form of a reduction in tourism and changes to the way we all work and live.

There are currently many unknowns and we will undoubtedly see the effects of Covid-19 play out for many weeks, months and potentially years to come. What we can say with certainty is that these are unprecedented times and the Covid-19 outbreak is being severely felt across all aspects of work and life.

The JMW Real Estate Team are well placed to assist you navigate the challenges of Covid-19. Visit our Covid-19 Hub and should you wish to discuss your specific needs, we are here to assist.

Ruth McCarthy
Head of Department
Real Estate Commercial

Email: Ruth.McCarthy@jmw.co.uk

Phone: 0161 838 2698  

Mobile: 0776 312 2465

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Ruth McCarthy is a Head of Department located in Manchesterin our Real Estate Commercial department

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