The COVID-19 pandemic has made waves in the UK property sector, with far-reaching effects for all types of real estate. As city centres emptied and people left the office to work from home, demand for retail and office space suffered huge setbacks. In contrast, a shift towards online shopping and home deliveries has benefited warehouse space, while soaring investment in biotechnology has sparked interest in life sciences campuses.
This article looks at which sectors have been most heavily hit by the pandemic and the ones that have fared better.
Retail property
The decline of shopping centre and high-street retail is not a recent phenomenon
Periods of lockdown have seen consumers move to online shopping faster than ever before, and the pandemic has exacerbated an already-severe crisis for the retail property sector.
JLL estimates that there are currently 40,000 vacant retail units across the United Kingdom, a number forecast to double by 2026. With the shift to e-commerce likely to become a permanent feature of post-pandemic shopping habits, many bricks-and-mortar stores will likely continue to contend with falling footfall, leading to further store closures.
According to the British Retail Consortium, rent debt accumulated during the 15 months through June 2021 amounted to more than £6 billion, as shops, pubs, bars and restaurants were forced to stay closed during much of this time.
Although the reopening of these sectors and the relaxation of all social distancing restrictions should now provide some respite for struggling businesses in the retail and hospitality sectors, the prospect of this huge debt being paid off quickly looks rather slim as fears about the rapid spread of the Delta variant persists. In addition, despite intense lobbying from the property sector, the government has recently extended a ban on commercial evictions until March 2022, fuelling frustration among property owners who claim that many well-performing businesses will continue to withhold rent using government protections as a shield.
As retail property vacancies are likely continue to increase, landlords with significant retail holdings are faced with an obvious choice: to offer lower rents and therefore continue losing income, or to divest further retail assets in their holdings. Failure to react may result in the same fate as that suffered by shopping centre giant Intu Properties, the standout victim of the pandemic, which fell into administration in June 2020.
Offices
As workers have remained home during the pandemic, office space has lost its appeal. Even as the vaccination programme progresses and the government withdraws its guidelines urging people to work from home where possible, offices are proving hard to repopulate.
Even corporations that have been vocal in their support for a widespread return to the office are now postponing a return to normal. The government now recommends a gradual return to the workplace, while the current surge in coronavirus cases is unnerving employees and employers alike about any immediate return. At best, companies are encouraging their employees to spend more time in the office over the summer on a voluntary basis.
According to a survey by Accenture:
- Approximately 24% of UK’s one million financial services workers would prefer to work entirely from home in the future.
- More than two-thirds said that they would prefer to work in the office just two days a week or less in the office.
- Only 8% would favour a return to a five-day week in the office.
Property investors are realising that homeworking or home-office hybrid arrangements are not just the preferred option for staff, but for employers as well.
Many companies are beginning to rethink their property needs, with many delaying new leases or downsizing.
No one knows exactly how the COVID-19 pandemic will affect long-term attitudes to work. Many companies are expected to embrace some degree of flexible working in the long term, so there is scepticism that office occupancy will return to pre-pandemic levels any time soon.
Despite this, recent signs of a recovery in the office sector have materialised, with a number of property investors betting that demand for high-quality offices will bounce back due to a desire for office space that promotes innovation and collaboration, and with high sustainability standards.
For instance, property developer Great Portland Estates has recently bet £800 million on future demand for net-zero carbon offices in London and, subject to planning permission, the company plans to start building the first of four major office buildings in its development pipeline in January 2022. As remote working reduces the total level of demand for offices, opportunities remain for high-quality space.
Warehouses
Although demand for warehouse space has been on the rise for a long time, fuelled by growing urban populations in need of more goods and services, the pandemic has accelerated this structural trend.
Amid the higher take-up of e-commerce, both occupier and investor demand for warehouse space has gone through the roof.
According to real estate services company CBRE, the shortage of warehouse space brought about by the e-commerce boom has led to the United Kingdom requiring an additional 60 million square feet of warehouse space by 2025, equal to 14% of current levels.
In addition to the rise in e-commerce, the pandemic has also accelerated another structural theme driving occupier demand for warehouses, namely the increased usage of data and therefore the requirement for capacity in data centres to support this. It is no surprise that property portfolios heavily focused on warehouses and logistics space have seen huge investor demand.
Warehousing specialist SEGRO plc has outpaced its rivals in the Real Estate Investment Trust Activities industry. In spite of falling industry revenue, SEGRO has recorded double-digit growth over the past five years and gained considerable market share in the industry. In its most recent annual report, SEGRO said that by the end of December 2020 it had received 98% of rents due in 2020, with the remaining 2% due in the early part of 2021. Amazon, Fedex, Royal Mail, Tesco and Ocado, whose businesses are widely regarded as pandemic success stories, all appear among SEGRO's top 10 clients.
Private rental
The pandemic-induced oversupply of retail and office space has offered an opportunity for property developers to repurpose this space to housing. With JLL estimating that the UK will have a shortfall of more than 750,000 new homes over the next five years, property developers have seen the potential in transforming towns and cities in order to provide some relief to the UK’s chronic housing shortage.
For instance, the City of London Corporation, the municipal governing body of the City of London, has recently announced plans to create at least 1,500 residential units by 2030 by repurposing offices and other buildings left empty because of the pandemic.
Whilst the residential rental sector has traditionally been dominated by small-scale landlords, recent tax changes have made it less attractive.
Instead, the sector is increasingly catching the interest of unlikely investors such as banks looking for new income sources to compensate for low interest rates. Lloyds Banking Group has recently become a private landlord; the bank expects to have its first tenants at a development of 45 apartments in Peterborough and, under the new brand Citra Living, it plans to acquire more than 1,000 residential properties by the end of 2021.
This new business model could be replicated by other lenders, as it allows them to generate rental income while also cross-selling products from their other business offerings, such as home insurance and rental deposit loans.
In another sign of the growing popularity of the rental sector, department store chain John Lewis has also recently outlined plans to build a residential property portfolio, transforming excess space on land it owns to build 10,000 homes over the next decade. Similarly to banks cross-selling their core products, John Lewis would offer its tenants the option of renting the property fully furnished with the department store’s products. In addition, some of these developments would likely have a Waitrose convenience store incorporated. Discounted rent may also be offered to John Lewis employees.
Life sciences campuses
Life sciences campuses are another fast-growing segment in the property sector and the success of this segment has been fostered directly by the pandemic, which has fuelled huge investment in research and development.
Amid surging investor demand for high-tech life sciences campuses, supply of space appropriate for these activities is limited and rents are therefore soaring.
Typically located in the vicinity of education hubs, properties can resemble conventional offices or complex labs. According to consultancy Bidwells, in 2020as much as £2.4 billion was invested in life sciences property in the golden triangle between Oxford, Cambridge and London, a focal point for the higher education and research industry. GlaxoSmithKline has recently announced plans to build one of Europe’s largest biotechnology campuses in Stevenage, Hertfordshire.
Conclusion
While the structural themes that have underpinned real estate activity have been at play for a long time, the pandemic has turbo-charged these dynamics.
These seismic changes have been noted by real estate investors, who have reassessed their investment priorities and repositioned their portfolios accordingly, moving away from retail property and traditional offices and increasingly towards space that suits the post-pandemic landscape. REIT British Land is one of the latest to have taken note, recently announcing plans to convert retail stores and car parks into warehouses and delivery centres.
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