Is Short Term Negative Perception Hurting Commercial Property Valuations in the UK?

Summary

• Lockdown, social distancing measures, and increasingly popular work from home facilities are taking the sheen out of the commercial real estate in major high-profile areas in the UK
• Falling rental income, and high uncertainty regarding how long it is going to take for the pandemic to subside is creating a state of scepticism in the minds of small investors
• Long-term investors like hedge funds and private equity investors are taking a contrarian stand and have expanded their investments in the commercial property sector in the past few months

The commercial real estate sector in the United Kingdom is going through its worst period since the 2008 financial crisis era. The shrinking rental income, growing vacancy by an increasing number of tenants and the deteriorating macro-economic situation in the country is taking a heavy toll on the valuations of commercial property in the United Kingdom. However, the perception among the general public on the present state of affairs in the country, and the falling state of consumer confidence is what causing the maximum damage to the commercial property industry. The quarterly survey of Royal Institute of Chartered Surveyors that came out recently depicted some gloomiest figures in nearly a decade. Seventy-nine per cent of the respondents to the survey reported that the demand for office space in the country has deteriorated over the second quarter of this year. As much as 93 per cent of the respondents stated that they expected businesses to scale back their operations in the next two to three years and nearly a third predicted that there would be an accelerated migration of people to suburban locations from city centres.

How badly has the coronavirus pandemic impacted the commercial property market in the UK?

The outbreak of the coronavirus pandemic has impacted how we live, how we work and how we interact with each other in our day to day life. The ease with which the virus is able to spread from one person to the other via respiratory droplets makes it highly risky for people to come out of their homes and meet each other and go about their day to day businesses. Hence activities like going to a store, supermarket pub, cinema or any recreational venue has been strictly restricted in most of the countries after the rapid spread of the viral infection were reported.

While the retail industry was very badly affected by the pandemic with thousands of stores shutting down after the lockdown in the country was imposed. The change in perception of the people regarding safety, livelihood and future wellbeing prompted many to contemplate moving away from crowded urban city centres like London to suburbs. This, along with the increasing prevalence of work from home, thanks to high-speed internet connectivity, has also brought down the appetite of businesses for renting out expensive commercial properties.

The rental income of most of the commercial space renting companies in the UK have been severely truncated, and most of them are expected to report losses this year. This has brought down the valuations of many of the otherwise well-performing commercial property lending companies like Land Securities Plc (LON:LAND), British Land Company Plc ( LON: BLND), Derwent London Plc (LON:DLN) and Great Portland Estates Plc (LON:GPOR) to lose their market share values significantly since the outbreak of the Covid-19.

Which are the sectors impacting most the commercial property markets?

The Retail sector can be called one of the most responsible sectors for the heaviest beating the commercial real estate sector took in the past few months. The increasing appetite of people to purchase online in an easy and hassle-free way had already been eating into the market of traditional shop floor retail industry, and with the advent of the coronavirus, pandemic safety became the most important consideration. Many of the traditional store-based retail companies in the country have already shut their shop, and the ones that are remaining have been actively reducing the floor space they have taken on rent. Other than the above, there are still several who have either not paid rent to their landlords or are trying to negotiate a lower rent payment because of the volatile market conditions.

Most of the companies who take office space on rent have been able to put most of their staff on work from home and are increasingly starting to realise that they can save a lot in terms of rent if they continued with this arrangement even after the pandemic subsides. Recreation, hotels, restaurants some other important businesses that were deeply impacted by the pandemic, as their revenues depend a lot on the number of footfalls they get on their premises, they have also impacted the commercial property market, as they have extensively shelved their expansion plan and a lot even planning to curtail the existing one.

Is there any perceived difference between small and long-term investors?

The current perception of gloom, however, only seems to be deterring the short-term investors in the commercial property markets. Long-term investors like hedge funds and private equity firms have been quite active in the market in the past few months. These investors whose long-term value perception of the commercial property industry is in sharp contrast to what the current market sentiment is, have been using this opportunity to make strategic investments into this sector. Canadian company Brookfield Asset management who have a stake in the Canary Wharf financial district took up a 7.3 per cent stake in British land in the month of May. Tristan capital partners a London based boutique real estate investment management firm picked up a 13.2 per cent stake in City Developer McKay Securities in the month of April while Canadian alternative asset management company Brookfield Asset Management Inc is also said to keenly looking for investment avenues in this industry.

It is all in the perception that makes people see the same thing differently. The doomsayers thus are missing on the wisdom and experience that the more astute investors have, making them act impulsively with the intent of not missing the bus.