Martin Devine: Commercial property sector weathers the storm
Martin Devine looks at the state of the commercial property sector during the pandemic.
It has been a tumultuous year for the commercial property sector with Covid-19 disrupting investors’ plans and, at least in the short term, bringing transactional activity to a shuddering halt.
Looking back we didn’t have our troubles to seek at the start of the first lockdown period, and not surprisingly investment activity almost completely stalled. Surveyors could not visit properties, which made transacting challenging, and the impact of the virtual closure of the court system and the Land Register made completing any transactions which could potentially be settled, nigh on impossible.
Instead, our focus at Pinsent Masons shifted to helping landlords and tenants navigate their way through rent recovery, rent concession discussions and obligations which would continue despite the pandemic.
The investment market relies heavily on predictability of the future and working through that completely unpredictable period naturally led to investors pausing planned activity and taking time out to look at what may or may not happen in the months ahead.
The uncertainty lasted until June and while deals completed sporadically, it was only when lockdown restrictions eased that we started to see the challenges of the previous months being overcome. When things did pick up it was in the industrial-logistics and residential sectors which saw most activity.
In residential – by that I mean housebuilding – the economics of the housing market are different to any other sector and with the continuing chronic shortage of housing across the UK, activity levels remained fairly constant. Housebuilders and developers took the view that they needed to keep going and to battle through the pandemic, although a drop in planning applications since March indicate change is on the horizon.
Residential rents held up remarkably well in comparison to the commercial market, with most investors reporting that they received more than 90 per cent of the rents due to them. This may be explained by the necessity for home working and many people may have felt a psychological imperative to continue paying rent to ensure they had not only a roof over their heads, but a place to earn a living.
However, it was a different story in retail, with some landlords only receiving 15 per cent of rents due to them at points during the year as a result of deserted High Streets, obliterated city centre footfall and an explosion in online shopping.
With a huge number of retail units closed as a result of the pandemic and many not likely to re-open, the situation remains potentially disastrous for local authorities throughout the country. For economic prosperity to be maintained we need vibrant city centres which serve local communities as well as providing must-visit-attractions for the tourist pound. The question remains – when this is “over” will consumers return to the physical retail experience or will e-commerce and online shopping have become the norm?
Landlords are for the most part still unable to terminate retail leases, even if they wanted to, but for retail investors Covid-19 may prove to be the trigger which pushes the potential repurposing of retail space higher up the agenda. This is a hot topic which requires the attention of not only investors if they are to secure viable financial returns, but local authorities who are tasked with reinvigorating our city centres.
The logistics space was buoyant pre-Covid-19 and the pandemic has only served to strengthen this sector as a popular option for investors. For a while there has been much greater focus on broadening out “last mile delivery” capabilities where the massive online retailers seek to localise their distribution networks and improve delivery times by placing stock closer to the end-user-clients.
The stampede to online shopping during lockdown has intensified the requirements from those e-commerce giants – or more directly their distribution agents – to snap up industrial premises closer to urban populations which can be used as satellite depots, and demand for suitable industrial units shows no signs of abating.
Looking ahead, we have to hope the successful roll-out of Covid-19 vaccines in the coming months will help us move quickly out of this third lockdown and a return to some kind of normality, which in turn acts as a confidence booster for commercial property investors across all sectors. Without that, the outlook for 2021 would be a frightening prospect.
Martin Devine is a partner at Pinsent Masons