"Could Harry Kane Save Shopping Malls?" and some general thoughts on the property industry.

Industrial Property

According to research by Colliers, UK industrial land values collapsed by a massive 47.4% during the second half of last year. Average values per acre fell from £2.86m at the midpoint of the year down to £1.5m, in part due to the broader economic backdrop, but most notably due to inflationary pressures on construction costs and the increased cost of debt. The shift appears to have coincided in part with Amazon reversing their substantial uptake of space and stating that they would not be taking on additional leases for the foreseeable future. At the same time, others speculate that Brexit caused a pre-exit hoarding of goods and materials that has since been winding down and no longer requires the same amount of space to house it.

Working from home, the ongoing normal?

Meanwhile, Twitter, with its new owner Elon Musk at the helm, announced that it was ending working from home for its staff, following its elimination of 11,500 jobs in November.  Dublin is Twitter’s European HQ and the mass reduction of their workforce at the same time as the European Union introduced strict new laws to police technology companies is proving problematic for the company, reports the Times. Facebook followed suit announcing it would cut 11,000 jobs, 13% of its workforce.

Working from home remains contentious, with many firms still operating the same pandemic-influenced hybrid policies. There seems no doubt that flexible working is here to stay however, and Bloomberg reports that three-quarters of Londoners would rather quit their jobs than return to the office full-time, suggesting that only a pay rise of 16% would tempt them back. Of 500 workers surveyed, they confirmed that 95% work in a business that allows flexible working and 73% believe that it is here to stay, with only a small variance between age groups. They cite transport costs, commuting time, work-life balance and higher productivity at home as the key drivers. There is no doubt that in the current tight labour market employees have more control in this debate. Time will tell if that prevails as the tables start to turn.

On the other side of the argument, reasons to be in the office were given as saving on heating costs, office amenities, networking, increased productivity in the office, collaboration and knowledge transfer.

The ultimate answer will continue to be that there is no ‘one size fits all’ solution and I have written previously that each business will have to understand what system suits them best, with seemingly little consistency, even in the same industries.

International investment in the UK market

In better news, the German investor Patrizia this week said that the UK is fast becoming “the only market to play in” across Europe for investors looking to snap up re-priced assets. We are seeing this in our own business, where we have been helping clients buy buildings at discounts touching 20% from their peak in Summer 2022. We wait to see if the still-climbing bank interest rates affects those with higher leverage, where interest costs will eat into yield. Clients are however reporting more opportunities, following a busy end to 2022 and a quieter start to 2023.

Retail property

The title of this piece (Could Harry Kane Save Shopping Malls?), is taken from a recent Bloomberg news story. Let me be clear – I am an Arsenal fan, so I almost passed on it straight away! The piece explained about anchor tenants in shopping centres – that they entice other tenants that want to trade alongside them, for which they are often given reduced rents in return. The rise of e-commerce has significantly changed that. Many department stores have closed and left centres with no anchor tenants. This has created opportunities for businesses like Toca Social, an interactive football and dining experience, combining immersive gaming with food and drink – and an example of the rising popularity of experiential entertainment such as Putt Shack (golf), Flight Club (darts), Bounce (table tennis), as well as cricket and even axe throwing. Harry Kane has invested in Toca Social and the company is hoping to add 50 sites in the UK and then expand internationally. Harry is, of course, also hoping to add some silverware to his collection at some point!

Interactive experiences are good for shopping centres, as they attract families and children during the daytime and those out to socialise in the evenings. This could help fill the voids left behind by department stores, as experiential offerings often need the larger spaces they traditionally occupied.

Many spaces that used to be offered to department stores are now being offered to similar leisure businesses and up to two-thirds of the set-up costs can be fronted by landlords as an incentive – sometimes reaching £8M in value for a high-end fit-out. These businesses are proving successful, and Putt Shack recently raised $150M from BlackRock.

Landlords just hope they can give shopping centres a new lease of life, as the balance of online and physical shopping continues to find its equilibrium.

Office occupancy rates and influencing factors

Meanwhile, in the office sector, Estates Gazette (EG) reported on 11^th February that the national weekly average of office occupancy has reached 34.3%, the highest level since the return to work post-pandemic in 2021. The highest attendance is unsurprisingly on Tuesdays, Wednesdays and Thursdays, where occupancy rates are regularly around or in excess of 40%. The West End achieved a weekly average occupancy rate of 43.9% in the final week of January and 49.4% in the Docklands.

The local amenities are not all benefiting though, as UK office workers are not spending on lunches near their workplaces at the levels that they did just after Covid restrictions ended, as inflation crimps budgets.

EG also informed us that ultra-high net worth individuals and family offices are primed to plough £2.4bn into London offices in 2023, 60% more than in 2022 according to Knight Frank. This is a pleasing statistic if it turns out to be true. The ability of those not reliant on debt to transact in the current market will undoubtedly be an advantage, whilst the debt markets stabilise and investment returns are recalibrated accordingly.

Legal updates and highlights

In the legal world, there has also been a lot of activity. Here are some highlights:

• The transition period for the Register of Overseas Entities has come to an end. Overseas entities who already own or lease land or property in the UK need to have registered with Companies House by 31^st January 2023 and inform Companies House who their registrable beneficial owners or managing officers are. This also applies retrospectively to overseas entities who bought property or land on or after 1 January 1999 in England and Wales. Entities that disposed of property or land after 28 February 2022 will also need to register and give details of that disposal. After registering, the overseas entity will get a unique Overseas Entity ID to give to the land registry when it buys, sells, transfers, leases or charges UK property or land.
• From 1 April 2023 rateable values for commercial property will change. It has been six years since the last revaluation and the latest has been based on a valuation taken at 1 April 2021, specifically to reflect the impact of the pandemic on rental values during the period. If you are a landlord of a lease that has already contractually expired or is shortly to do so and you have plans that require the property back from the tenant, it may well be worth considering whether:
  • to serve a hostile notice now where compensation calculated by reference to rateable value is involved, or
  • to wait until after 1 April, if the level of compensation payable is likely to be materially affected by the revaluation.
• The owners of luxury flats opposite Tate Modern’s viewing gallery face an unacceptable level of intrusion that prevents them from enjoying their homes, the Supreme Court has ruled. The Court ruled against the earlier Court of Appeal decision, determining that this was a ‘straightforward case of nuisance’. This has been described as an historic decision, in that it is the first time that English law has recognised that a visual intrusion from neighbouring land can amount to the tort of private nuisance.
• The concept of a new Grade III listing for certain buildings of note has recently gained prominence. The idea is that a building with such a listing would be precluded from being demolished and development could only be undertaken by way of retrofit. The property may only be demolished if it is structurally unsafe or is given special dispensation by the local planning authority. The Times reported that the TV celebrity Kevin McCloud (host of the TV show Grand Designs) is supportive of the idea and that the UK’s built environment produces 25 per cent of our carbon emissions. By 2035 embodied carbon is predicted to account for half of the built environment’s CO2. The recent example of the demolition of the old Marks and Spencer store on Oxford Street is given as an example of where this could have been applied, although it is likely to be the case that retrofit would likely have been too expensive to have been a realistic alternative in that instance.
• Michael Gove has pledged to bring forward laws to scrap most ‘feudal’ leaseholds in England this year. Whilst this is a notable headline, the detail is somewhat less impressive, relating mostly to removing limited blocks on flat owners buying in their freeholds and taking over the management of their blocks, for which wide rights already exist in both instances. The uneasy symbiosis of commercial and residential property is one most practitioners will know well, taking careful note of when Section 5 of the Landlord and Tenant Act 1987 applies and the criminal liability that it carries for any breach.
• The recent case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] established the service charge basis of ‘pay now, argue later’ when it comes to service charge disputes where the lease contains a no set-off provision.
• A recent landmark verdict at the Court of Appeal relating to the Davies v Bridgend County Borough case could signal a wave of Japanese knotweed litigation. Japanese knotweed is an invasive species that is notorious for spreading and damaging building structures. It is difficult and expensive to get rid of. The case reminded practitioners of the need to advise clients that replies to enquiries are warranties that carry liability if found to be incorrect. The Times reported that the seller of a property ticked “no” to whether knotweed affected the property. The barrister for the claimant pointed out that the seller could have ticked ‘not known’ instead of positively asserting that there was no knotweed at the property.
• Finally, EPCs. The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (MEES Regulations) are intended to improve the energy efficiency of both residential and commercial private rented (PR) property as required by the Energy Act 2011. Part 3 of the MEES Regulations are designed to incentivise landlords to make energy efficiency improvements to certain let property which is currently sub-standard. Subject to limited exceptions, two key measures introduced by Part 3 of the MEES Regulations for non-domestic PR property, (a term which will cover most, but not all, commercial property), are as follows:
• A prohibition on granting new leases of sub-standard non-domestic PR property, on or after 1 April 2018, without a legitimate reason; and
• A prohibition on continuing to let sub-standard non-domestic PR property, on or after 1 April 2023, without a legitimate reason as permitted by the MEES Regulations. This applies whether the leases were granted before or after 1 April 2018.

Under Part 3 of the MEES Regulations, a landlord of sub-standard non-domestic PR property must not grant new leases or continue existing leases of that property (from the relevant date in each case) unless the landlord either makes sufficient energy efficiency improvements to the property (so that it is no longer sub-standard) or can claim one of the legitimate reasons not to do so and this has been validly registered on the PRS Exemptions Register.

What’s new at Memery Crystal

At Memery Crystal we signed off a busy 2022 with two transactions of note – the purchase of the impressive Bryon House in St James’s for a sum in excess of £45M– please read about it here and the sale of a portfolio of approximately 55 buildings let to Medivet veterinary practices.

I am also proud to share that I recently achieved a top-tier ranking in the Chambers and Partners legal directory. Something of which I am exceptionally proud.

We can help

The new year promises different challenges and different opportunities. The Memery Crystal Real Estate team is ready to work closely with our clients as they navigate a continually fluid business landscape and to provide market-leading legal advice as their trusted advisers.