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The future of property investment

The property market is in flux, as it adjusts to the likely changes in behaviour caused by the pandemic. We examine the different issues that may impact the valuation of industrial, retail and office buildings.

The property market is currently in flux, as it adjusts to the likely changes in behaviour we will see after the pandemic. We examine the different issues that may impact the valuation of industrial, retail and office buildings.

Charles Stanley

in Features


The adjustment of property values in the property shares and REIT markets was fast and severe when the lockdowns arrived. There was a sharp sell-off followed by a partial rally. The adjustments in the valuations of the underling buildings has been altogether slower, with valuers hesitant to make big changes – and unsure what might lie ahead.

Most valuers and most market participants have agreed for some time that there is plenty of demand for space and for investment in industrial buildings. The new economy post-pandemic, like the economy of lockdown, will need more space for distribution as online commerce continues to grow. It will also need more space for the servers and cloud storage of the data explosion that will result.

There has been near-universal agreement that we have too many shops, so the ones in marginal locations, in failing High Streets or places that have lost a lot of footfall in a hurry are vulnerable to big rent cuts or voids as tenants struggle to get their costs down or decide to give up altogether.

There has been more of a two-way pull in views of offices. Some think there will be much more homeworking even after lockdowns end, leading to businesses saving on total space particularly in expensive city centre locations. Others think there will be a bounce back in office use, with some offsetting demands for more space for better working conditions. Companies will on this analysis get used to paying for a large office but accepting any individual may work some of the time from home. Offices may not have many people in them on Fridays or even on Mondays.

More retail property woes

The shop sector was very overvalued. It had been bid-up by the strength of retail in busy locations such as airports, train stations, and fashionable city centres.UK landlords took a good share of the revenues in the form of fixed rents, with long leases and upwards only rent reviews at specified times. The landlord was largely protected from any downturn in trade, with the tenant having to pay or vacating the premises through bankruptcy – so someone else would pay up.

Leading retailers were already telling landlords this had to change before the pandemic. Many were saying they wanted to reduce the number of stores, weeding out the poorest quarter or third of their portfolio. They also wanted lower rents for the ones they kept, as they changed the use of the buildings to support an online alternative through click and collect or to be the real-world shop window you could visit to view goods.

The lockdowns have led to many retailers accelerating their plans to close poor-performing stores. They also want turnover-related rents so the landlord shares the pain of downturns or lack of success in the retailers model, whilst benefitting from some of the upside if the store does well. The aim is to create a greater identity of purpose between the retailer and the shop owner, and to insulate the retailer more from failure whether through external circumstance or poor merchandising.

Landlords have been reluctant to accept this big, adverse change in their revenues. They are now often forced to as bankruptcy or administration allow the tenant to walk away from traditional leases. Often the only ‘win’ the landlord has faced with a turnover rent or no rent is to insert a clause allowing termination of the lease should a better offer emerge. There are also difficult issues over what turnover the landlord can share. Does it include some portion of the online revenues supported by the shops?

The truth is that shop values do need to fall more to make it commercially worthwhile for more investors to buy-up unpopular shops and to convert them or redevelop them into something more useful. At pre-pandemic values, shops were expensive relative to other UK property, slowing the natural process of conversion to residential or service establishments or offices.

Offices are in the balance

Whilst many people may rush back to favourite restaurants and cafes as soon as lockdown is released, many office workers like working from home and will be trying to ensure they do not go back to five days a week on the tube or commuter train. If employers are to accept hybrid working as a norm – with some added costs for the employer – they will look for a win by reducing the amount of space in the office estate.

If many people come in less than half the week, a system of hot-desking or flexible hosting of employees could reduce the total footprint needed in the office, saving on space and rent. The office may be used more for meetings, collaborative working, meeting clients and suppliers and providing face-to-face interaction, which is often better than screen time. Where a person needs to work quietly and with concentration on a computer, it may well be better to do that from home – depending on their housing and family circumstances.

There is also the question of whether larger companies will help employees who dislike long commutes by going for more satellite offices closer to where people live. These would also be cheaper than prime rents in city centres. It too will require hybrid working and mean an employer will want some property cost savings on the city centre office to offset to make it worthwhile. It invites the thought that some offices will need to be converted to residential in cities.

Big cities have a future post pandemic. London will revive as a major centre of arts, entertainment, fine dining, tourism and the rest. It will become again a place to meet others with similar interests chosen from a wide range, and to spend leisure time well. This will mean it will continue to need plenty of accommodation for those who like the city life, but it may not need so much office accommodation for those who want to live beyond the city confines with more space and gardens.

We remain cautious about property investment overall as the market seeks to adjust to these big changes. Industrials have seen big gains with a fall in yields. From here, the investor will likely be more dependent on rising rental income in a market which stays in favour. There needs to be more reduction in retail space and greater clarity on what the winning shopping areas will look like before retail overall is popular again. There is more of a two-way market in office property, with a shortage of new developments to offset some of the worries about future demand for space.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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