Business Leaders Predict Office Downsizing, How Will Office REITs Be Impacted?

Summary

• Offices plan to relocate to smaller spaces: Accumulate Capital survey findings
• BP mulling over reducing its office space drastically
• This could adversely impact the commercial real estate market, at least till the effect of the coronavirus pandemic completely subsides
• REITs could also be impacted; investors should undertake a closer study of the stock fundamentals before making any investment decision
• UK Commercial Property REIT Limited trading lower than the pre-pandemic levels

A latest survey by Accumulate Capital was conducted interviewing 500 plus business leaders in the UK. It revealed that almost three fourth of these leaders surveyed said that their office premises would have to be relocated to smaller commercial properties, as an aftermath of the coronavirus pandemic. Accumulate Capital is a UK based property investment and consulting firm.

37 per cent of these decision makers expressed that they were in the process of downsizing their office space in the next one year’s time frame.

More than half (58 per cent) of the people surveyed felt that working from home would be the new standard practice followed, for times to come. Despite the government ending its work-from-home advice and asking people to actively resume operating from their offices, many companies are not encouraging the same. They have instead allowed their staff to continue to work from home, fearing a resultant surge in coronavirus infections.

Media reports suggest that out of all the European countries, Britain has the largest proportion of workforce still working from the comfort of their homes.

BP looking to reduce its office space drastically

The global oil and gas major British Petroleum (BP) is planning to restructure its office spaces. According to media reports, the company could slash its property portfolio by almost half at some of its office locations.

It is mulling over shifting almost 50,000 staff to their home locations or provide them with a flexible workspace option. It plans to do the same by increasing its digital working footprint across the globe.

Due to the deadly impact of the pandemic, BP is being forced to sell off some of its office premises. It may also not renew the lease deed for many of its commercial outlets.

This is expected to be the company’s most drastic property downsizing decision in its 100 plus year long history. It is being speculated that the company could downsize its total global office space footprint by more than half.

Impact on the commercial real estate market

As is evident from the results of the Accumulate Capital survey, most businesses are already looking out to move to smaller and flexible office spaces. This will have larger ramifications for the real estate developers and office landowners.

Market experts predict that going forward, not every staff member would have an individual desk to work on, in the dynamically changing environment.

Businesses are severely impacted across the nation and most sectors see declining revenues, low demand, supply chain disruptions, and expect to cut jobs.

However, on the positive side, two sectors that are least likely to cut jobs are financial / professional services and TMT (technology, media, and telecommunications).

Will REITs be affected?

Theoretically, Real Estate Investment Trusts or REITs should benefit in case the demand for office spaces improves once the pandemic times are over as most people get back to working as usual, inside their offices for most part of the day, even though work-from-option could also be available to them, since the social and professional benefits of working at an office far outweigh that of operating from home.

The economy also benefits multifold when you go to office and during the commuting window, you eat out, shop for stuff, and spend money to entertaining yourself.

After the coronavirus pandemic struck the nation, the REIT stocks listed on the London Stock Exchange plummeted sharply, in line with the share prices of most other industries. But they also began to bounce back in within few weeks’ time. Let us take a closer look at one such REIT named the UK Commercial Property REIT Limited.

UK Commercial Property REIT Limited

This REIT is managed by Aberdeen Standard Investments and is listed as the biggest commercial property vehicle in the AIC UK commercial property sector.

Just before the onset of the pandemic in the country, the shares of UK Commercial Property REIT Limited (LON: UKCM) were trading at a high of GBX 88.4 on 22 January 2020. They dropped by almost half to a low of GBX 49 on 18 March 2020 and gradually recovered thereafter.

The company stock was trading at GBX 66.4 on 14 August 2020 at 11.57 AM, down by 0.9 per cent from the previous day’s close. Its 52-week low / high range was recorded as 49.00 / 91.00 with a YTD (year-to-date) return of (-24.04) per cent. It had a market capitalization of £ 870.61 million. The total volume of shares traded were recorded as 291,941.

On 6 August 2020, the company declared a property income dividend of 0.46p per share for the quarter ending 30 June 2020.

It is also noteworthy that institutional investors have a substantial stake in the UKCM stock, which adds to its credibility.

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To sum up, the Accumulate Capital survey found out that close to three-fourth of 500 plus business leaders surveyed plan to move out to a smaller office space, as a result of the Covid-19 crisis. Many of them are continuing to let their staff work from home, despite government having removed the related restrictions of coming to offices. The commercial property market is already struggling in this period and many of the REITs are trading at below-corona stock price levels. Investors should make a well-calculated decision while choosing to invest in office REITSs, by closely analysing the company fundamentals and future of the market.