Covid-19: Some thoughts on the real estate market
At a glance
“Clearly the questions and issues that flow from the current pandemic will be played out over many years to come and no doubt in ways that we have not even begun to consider yet.”
Our Co-Head of Real Estate Daniel Abrahams outlines his thoughts on Covid-19 and the real estate market.
I have spent the last few weeks speaking to numerous parties in the UK real estate market, from principals, agents, brokers, lenders, landlords, tenants and many others about their experience of the current Covid-19 crisis and their expectations for the time when this is behind us, whenever that may happen.
What seems clear speaking to these highly intelligent people is that there is an existential debate playing out, almost in real time, as to what the current hiatus in the market will mean for real estate, once the lock down ends and the pandemic subsides. Deals that were active and coveted went almost immediately on hold and a large number of those that were agreed have either been shelved or are moving at a glacial pace. Valuations cannot be undertaken, nor building surveys, or even the marketing required to maximise the sale price for real assets. What does all this mean for a late stage market where rents were perceived by many to be topping out? As lawyers we see the views of all of these parties and the impetus and influences on their decision making and calculations.
As an example, in the same day this week I spoke with two people, each with 20+ years’ experience, with polar opposite views on the serviced office sector. One was convinced that companies will move more to utilising the flexibility that the serviced offices can offer them, to allow them an ebb and flow of their staff numbers and to reduce their long term overheads when it comes to signing a traditional 10 or 15 year lease, with rent reviews, service charges and ultimately dilapidations liabilities. The other believed that the current crisis would live long in the mind-set of workers and that the appeal of an open plan office, with the exposure to others and potentially the level of hygiene of others in serviced office would keep large numbers away. Their view was that the open plan office model was likely to disappear and a return to cellular offices more of a probability. Will the might of companies such as WeWork even survive this period?
What is clear is that the level of government support provided during the Covid-19 crises will require significant tax raising to take place and the battered balance sheet of UKPLC and the companies that survive it to repay the billions handed out to keep businesses and households solvent. We are almost guaranteed a recession and the post-Brexit referendum language of recessions being ‘U’ shaped, ‘V’ shaped or now more in the context of a full on depression are rife.
What is consistent is that there is a feeling that there will be opportunity. One agent told me that this will be the biggest buying opportunity in 30-40 years. Some small measure of distressed selling is being seen already, but all sentiment seems to suggest that the market will be considerably more liquid than pre-lock down. Some will be forced to sell to fund redemptions, shore up the balance sheet, or hopefully to take advantage of the well-resourced buyers that were willing to transact previously, as they return to the market. It is important to remind ourselves that whilst the market was somewhat stuttering in the early months of 2020, there was no systemic issue of magnitude that was holding things back, compared to 2007/8, when the banks took the property world (and much of the rest of it) into what we thought would be our generational black swan event. Little did we know…
It is unclear whether some overseas money will be quickly repatriated, for example to China and the Far East, where so much investment has been from in the past 10 years or so. They are shrewd investors and will be balancing any need for capital against timing and the currency implications of cashing out, as opposed to waiting to see how quickly any recovery may arrive.
There has been a large amount of activity and negotiation in the past weeks between landlords and tenants to negotiate on the rents that fell due on the March quarter date. Many rent profiles have been restructured in the short to medium term to provide support in a way that should allow a measure of pain and protection to both parties. We know of some tenants who have sought to take advantage of the current situation by asking for rent holidays, even where their balance sheets are more secure than those of the landlord. Landlords in many instances will also need to consider their own finance position and the lengths that they can go to in indulging tenant requests for monthly rents, rent holidays, deferred payments and any other number of concessions that may help both come through this period intact. General comment suggests that somewhere between 60-80% of office rents were collected in March.
For those that are looking to profit from the deals that we hope will quickly be back in the market, we are yet to know whether the banks will be open to support them. Most are currently not lending and a number of the main clearing banks are supporting the government schemes to keep businesses afloat.
I mentioned an existential debate at the top of this piece and that also includes whether companies will need so much commercial real estate space in the future. Whilst a number of companies have moved to hot-desking and the idea that you should have less desks than staff, others have gone a more traditional route of keeping staff happy with ample break out areas and amenity space. This is what we were told the millennial generation wanted and all of which costs money.
Employers can now see how well their staff can work from home. At Memery Crystal we were live and operational with all departments and systems in place from the first day that we tested the whole company home working. This happened to be the day prior to the government’s advice for offices to close and we have not returned to our office since then. The question then is, does a company save significantly on their rent and run the risk of losing their ethos and culture, or pay more for the option of genuine face-to-face team working. Each business will need to make these decisions, but they are not for today. For today it is about surviving as a business. For us, it is about offering the best legal services that we can and supporting the decisions of our clients, now and when some form of normality returns. We pride ourselves on offering commercial as well as legal advice and being by our clients’ side offering support at the most difficult times as well as when they are plentiful.
What also for the future of transport? Will people readily cram back on to the Central line and their usual bus route, knowing that they will not be able to adhere to any form of social distancing? Will we have more cars on the road, or more green transport in bikes or walking and running as our daily commute? What will the effect be on the environment? Clearly the questions and issues that flow from the current pandemic will be played out over many years to come and no doubt in ways that we have not even begun to consider yet.
(Image by Benjamin Davies on Unsplash)