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The property consequences of the pandemic

The spread of Covid-19 has forced immediate changes to landlord and tenant behaviour that are bad news for investors – and may induce substantial changes to the use and value of buildings.

The spread of Covid-19 has forced immediate changes to landlord and tenant behaviour that are bad news for investors – and may induce substantial changes to the use and value of buildings.

Charles Stanley

in Features Fiduciary news


Property has been a great investment in many centres since the banking crash. It has traditionally rested between bonds and shares. Like shares, it had a rising income, as rents often rose with economic growth and increasing prosperity. More like bonds, the income was thought to be more reliable than dividends on shares. After all, a tenant company had a legal obligation to pay the rent, and would, if necessary, scrap the dividend to avoid a lawsuit over the tenancy.

This happy, apparent compromise between growth in income and yet more resilience of income could prove attractive. Often in recent years the yield, or running income level, was higher on property than on either shares or bonds. There was also often scope to enjoy capital gains on the holdings.

Longer-term retail issues

Our approach to UK property investment differentiated between retail and the rest. The first dent in the attractive characteristics of good-quality property came with the rise of internet shopping. This coincided with strong and healthy competition between major store groups, who put in substantial new floor space or joined in new shopping centre developments, which pushed out the national floorplate.

We, along with many others, warned that retail properties commanded high rents compared to warehouses or offices, and capital values were similarly extended. It seemed likely the trend would be for retail groups to be forced to retreat and shed space gradually, as they felt the competitive pressures and as they shifted more of their own sales to online.

So, it proved. In the run-up to Covid-19, retail properties underperformed badly, with leading shop groups negotiating rent cuts instead of the previously normal rent rises each time a lease ran out. Many set out plans to move to a smaller number of outlets concentrated in the centres with the most footfall.

Investment and property professionals spent the last few years seeking to reduce their exposure to retail, whilst increasing their exposure to industrials or warehouses. These Cinderella properties of past decades came to the property ball as the new execution houses for online retailers, and the new spaces for the stars of the digital revolution. The prices of these properties appreciated as shops fell. The office market stayed solidly in the middle, making gains and advancing rents but at nothing like the speed of the industrial sector.

The onset of lockdowns has greatly accelerated the trend to online from physical shops. All those who switched in good time can feel pleased with the results. Those that had not completed the transition may still have some reason to do so at today’s less-advantageous prices.

Whilst the market believes retail rents have considerably further to fall, the journey can still prove expensive for the owners as it may not be fully discounted even in today’s reduced prices. The capital value of shops is such that it is often difficult to make the economics work of buying one and turning it into something else, slowing the pace of physical change. For the market to stabilise there has to be a reduction in retail floor space.

Offices now in transition

The reason for our overall increased caution lies with offices. The pandemic has allowed a generation of office workers to experience working from home. Gone are the two or three hours a day commuting into a city centre and back with all the cost and hassle that can entail. It has come with the ability to manage home daily and be on the spot for deliveries, repair and maintenance services and the rest that are difficult to juggle in busy commuting lives. Parents have more time for the children, and the working day can be broken up in familiar and relaxing surroundings.

It is true not all like this. Some miss the company of colleagues, the ability to communicate instantly and easily with other employees, the social round a bigger company provides and the access to a large city at lunchtime or early evening, that going there to work affords. On balance, it is safe to assume that a substantial proportion will want to work from home more, if not all the time, and likely employers keen to keep talent and to learn from these experiences will make adjustments.

All the time the virus is a serious threat, businesses cannot recommend hot-desking and less space per person, but they can allow more people to mainly or wholly work at home as we come out of lockdown. They can find safe ways of needing less office. John Lewis has already announced it is shedding one of its two HQ buildings in Victoria, as it is no longer needed. Other groups will decide they either want a streamlined smaller HQ office in the centre of a large city – or think of a suburban or rural location for a cheaper but more expansive office with plenty of parking and more resilience against inner-city transport and crowd risks.

We do not expect the same kind of collapse in demand and rents for offices, as we have seen for shops. Most companies renting offices still have some turnover to pay the rent, whereas various retailer and service businesses operating from High Street locations may no longer be paying the rent and are probably insisting on a new cheaper deal or else they will walk away from their legal obligations.

The attrition on the central city offices will take longer and there will be those who still like the idea of the future buzz and talent pools of the big conurbations. The trouble is the virus has killed some taboos about property. It is now thought acceptable not to pay the rent in difficult circumstances. Leases with upwards-only rent reviews can be reviewed downwards, even before the official date of expiry. Too much property is now in the category of no rental growth, and plenty is in play for rent cuts. There is also the green revolution with expensive requirements coming to landlords, which will be the topic of a future posting.

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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