The Future of Real Estate
Key Contact: Damien Cann
Author: Charlotte Whitehead
The impact of the COVID-19 pandemic on commercial real estate in the UK has been dramatic. Shops, pubs and offices alike have been forced to close for an indefinite period interrupting the income stream that sustains this investment class. Amidst the multiple failures there will be opportunities for those with cash reserves and bright ideas.
Businesses such as Laura Ashley, Debenhams, Oasis and Cath Kidston, among others, have entered administration as a result of challenging trading conditions, exacerbated by COVID-19. The Government has suspended commercial landlords’ remedies for pursuing rent arrears against tenants who won’t or can’t pay to protect business. In truth such steps were rarely going to be an appropriate strategy as the promise of delayed or reduced rent is likely to be preferable to a lengthy void period where banking covenants need to be met.
Collaboration really does seem to be the best way through the crisis to rebalance the interests of landlords, tenants and funders albeit shifted in favour of tenants more than ever before. Savvy tenants will take advantage of the surfeit of unlet premises to negotiate lower rent payments. Prudent landlords will seek a relaxation of banking covenants breached by mounting rent arrears. Enlightened funders are unlikely to conclude that enforcing their security against viable businesses is the most effective long-term strategy.
Crisis brings change and it seem likely that the current pandemic will be the catalyst for a comprehensive reform of business rates when the emergency rates relief available to retail and leisure businesses expires. It also seems inevitable that now, cybercrime aside, the robustness of remote working has been demonstrated, office tenants will consider alternative workplace arrangements, such as serviced offices, which can provide greater flexibility for businesses and reduce fixed costs in the new normal.
As we emerge from the lockdown we expect to see high investment transaction volumes with increased voids likely to depress values and bring many distressed sites onto the market at attractive prices. It seems inevitable that town centre retail space will be repurposed for office or residential accommodation as the crisis accelerates the decline of the high street. It is hoped that residential conversions will respect the space standards that have been ignored when exploiting permitted development rights in recent years.
The striking images of empty city centres present a blank canvas. We may well look back on the pandemic as the moment the long called for transformation of the urban landscape to create more enjoyable public spaces began. The rate and extent of that change will be contingent on the rate of economic recovery.