With businesses around the globe having to close their offices and adapt to remote working, we talk to commercial property experts to find out what impact the coronavirus pandemic has had on commercial property values.
Use the links below to flick through the expert opinions:
- Harry Fenner – CEO of Navana Property Group
- Riaz Dudhia – Partner and Head of Commercial Property at Nelsons Law
- David Laws – Partner at Matthews & Goodman
- Jamie Allison – Head of Napthens” Real Estate group
- Gary Hemming – Commercial Lending Director at ABC Finance
Name: Harry Fenner
Position: CEO of Navana Property Group
Bio: Harry Fenner has long believed that the property industry is ripe for disruption by an independent, agile, people-focused property and place services business. One built with technology and innovation in its DNA, free from legacy systems and with the structure to react efficiently and effectively to change as it happens. This ultimately led him to found Navana Property Group.
What costs have there been on businesses forced to navigate away from the office to remote working?
Companies across the globe have been forced, if they weren?t already, to embrace remote working due to extended periods of lockdown restrictions. In the process, many businesses have now seen proof that employees don’t necessarily always need to be in the office to accomplish tasks and remain productive.
This, along with the cost-cutting needs many companies now have in the face of a prolonged global economic slump, is paving the way for a new model of working. When it comes to their real estate and workspace strategies, naturally then there is an increasing appetite for employers to move to a more balanced approach, where both remote and office working are offered.
This is putting many businesses, tied into long-term leases for occupancy of their office accommodation, under immense pressure. The passing of the Coronavirus Act 2020 suspended the ability to forfeit a commercial lease for non-payment of rent and this suspension was recently extended to 31st March 2020. This means that landlords are unable to enforce a right of forfeiture for non-payment of rent in relation to commercial leases until after this date.
This has no doubt been a lifeline for businesses who were struggling to pay rent during the height of the pandemic. Yet with commercial leases typically lasting from three to five years, many occupiers will still be feeling the pressure as the end of the suspension period approaches.
“Overall, this shift change towards remote working has and will continue to necessitate that businesses adapt their working models and use of commercial premises.”
The need for office spaces will never be fully supplanted by remote working. Yet in the age of a globally mobilised and remote workforce the role of the office is changing from a place where what we would traditionally call ?work” happens, to a place of collaboration, creativity, networking and learning.
Is commercial property a good investment for 2021?
There will of course be winners and losers amongst commercial investors in the year to come. Offices are certainly not dead although selective and strategic asset picking will be critical. Sector dynamics are changing and occupiers now have more optionality and leverage than ever before when it comes to their physical footprint.
Offices are going the way of retail in the sense that the sector is becoming increasingly polarised. Those workspaces and offices with an intentional value proposition located in the right places and offering a flexible tenancy model will see good uptake, whilst owners of undifferentiated and run-of-the-mill office stock continuing to pursue outdated and inflexible commercial terms with their occupiers will no doubt struggle.
This landscape will reward active investors that know the sector, choose their opportunities carefully and are prepared to be brave by operating under a partnership model with their occupiers.
Looking at the markets there is still an abundance of stored capital looking for return, not least from overseas players. Brexit finally being settled to some degree can only be a good thing for the confidence of international investors, and record low interest rates will be key recovery drivers in 2021. This will also be reflected in the debt markets with asset classes including logistics, build to rent and student housing being among the most popular.
Name: Riaz Dudhia
Position: Partner and Head of Commercial Property at Nelsons Law
Bio: Riaz qualified as a solicitor in 2005 and joined Nelsons in 2007. He is the Head of the Commercial Property team at Nelsons Law and has particular expertise in commercial landlord and tenant matters, land acquisition and disposal and commercial developments.
What costs have there been on businesses forced to navigate away from the office to remote working?
For our clients who rent their business premises, many have been working to negotiate rent payment terms that reduce the financial burden on them as tenants. However, not all of them have been able to negotiate terms with their landlords that completely negate the detrimental impact that has been sustained on their business as a result of the pandemic.
Upon the initial transition to remote working, not all businesses had sufficient IT infrastructures in place to enable them to work effectively from home and, therefore, had to make unplanned, significant expenditure into their IT systems to negate this issue. However, while this might have been an initial inconvenience, it’s arguably an investment for the future as it is likely that some semblance of remote working is here to stay.
While government financial incentives such as Business Rates Relief, the Coronavirus Job Retention Scheme (CJRS) and business interruption loans have undoubtedly helped to financially support businesses, there’s a counter-argument that the cost to companies in terms of commercial growth, staff culture and future planning is difficult to quantify. This is particularly the case for certain sectors such as retail and leisure that don’t have the ability to relocate their business operations and, as such, have experienced incredibly detrimental costs and repercussions.
Is commercial property a good investment for 2021?
Yes and no.
As we saw during the banking recession, the property investment market has created opportunities that did not previously exist. However, property investment that’s underpinned by commercial leases in the most affected sectors, food and drink for example, is likely to be considered high risk at the moment.
As the effects of the pandemic begin to subside, the time that it will take for businesses in these kinds of sectors to bounce-back will determine how attractive investing in commercial property used by these industries is. In my opinion, it’s likely that we ll see reduced rental yields during the course of this year.
In a non-pandemic world, commercial property investment is usually considered as a reliable source of passive income with a relatively low to medium risk, and that could still be the case for property investors during the course of this year. Particularly if investors fully consider the financial elements of the investment for example purchase price and rental yield as well as any supporting security to cover any rent payment issues on the parts of tenants in the future.
Name: David Laws
Position: Partner at Matthews & Goodman
Bio: David Laws has over 20 years’ experience in the Manchester city centre and out-of-town regional markets. Primarily focused on office space, he provides owner and occupier clients with agency and consultancy advice. He takes a strategic approach to business space, ensuring it meets his clients’ financial, operational and cultural goals.
What costs have there been on businesses forced to navigate away from the office to remote working?
The pandemic has changed how all organisations plan for their workspace.
The impact of physical distancing at work, combined with WFH (Working From Home) and multiple lockdowns (dissuading people from going to work) has led to a reappraisal of what organisations require of their workplace. After all, work is no longer a place you go to, but something you do in an office, at home, in a coffee bar, in your car – anywhere.
“It is interesting to note that WFH is now being superseded by WFA (Working From Anywhere).”
The net result is that lease breaks are being considered very closely, lease ends are perceived to be an opportunity to break the shackles of pre-pandemic workplace practices and sub-letting unwanted space (the grey market) is beginning to gather momentum.
?De-densifying” has emerged as the only viable way to accommodate physical distancing in the workplace. This means having fewer people in the same space. Serviced Offices are being used as an interim/short term resolution to the morphing requirements of the workplace, and are being viewed as an integral part of a ?blended workplace strategy.
Is commercial property a good investment in 2021?
A predicted 9% fall in the value of institutionally held UK commercial property investments, resulting in total returns at around minus 4.5% (based on the latest IPF Consensus Forecasts), will mask extremes between property sectors. For example:
- Returns for industrial and logistics assets will be positive
- Offices will probably see a fall in value in the range of 6% – 10%
- Shopping centres will decline by almost 30%
- Secondary and tertiary assets and those adversely affected by Covid will have seen significantly greater declines in value.
However, relatively high sustainable income derived from the property sector in a normalized environment, at an average income return of over 5% continues to provide enduring value against equities and gilts.
Name: Jamie Allison
Position: Head of Cumbria and of Napthens? Real Estate group
Bio: Jamie is Head of Cumbria and of Napthens” Real Estate group. In this dual role he is responsible for the development and implementation of Napthens” Cumbrian strategic plan and manages the commercial property, construction, rural and leisure & licensing departments.
What costs have there been on businesses forced to navigate away from the office to remote working?
As businesses have been forced to navigate away from the workplace what we ve seen is that rapid technological advances, a keenness on environmental and social values have now become key considerations for our properties and how we conduct ourselves in them – or don’t at all as we work more from home.
There have been the continuing ?on costs” of the fixed overheads still needing to be serviced for properties whether that’s insurance, communal, management or estate charges, as well as any financing for operational plant and kit within the properties and, of course, rent.
But, with rent, many landlords have had the ?deferment” or ?rent holiday” conversations with their occupants which, in the main have so far seen successful, collaboratively concluded negotiations.
“The cost increase for some SMEs has been in the adjustment to remote working, which was felt more severely for those who weren?t as tech ready.”
What this has done though is make businesses leaner, more tech-enabled, more aware of competitive pressures and actually able to manage disruption and people from afar, for which there are pros and cons.
Increases in software license fees, hardware requirements as well as contributions to bills at home all add to the cost mix and may seem significant upfront.
However, the infrastructure cost per employee to work and operate in an office environment is estimated to be around £12,000 per annum, versus £1,500 per annum for working remotely. So, although there is an up-front cost for setup, it means there are cost savings to be made in the long term.
Is commercial property a good investment in 2021?
Whether commercial property is a smart investment for 2021 depends what it is and how it’s being financed.
On one hand there are some who are shying away from city centre offices and looking at satellite location clusters to invest in. On the other hand some are pivoting into new sectors, such as warehousing, cold storage and logistics near road networks.
“Others are looking at remodelling town and city centre offices with a view to creating safe, collaborative workspaces which are agile, acknowledge the importance of wellbeing and practise being a cool” place to work – no office slides though please.”
That said, occupier demand increased in the third quarter across the industrial sector.
However, there are perceived issues with retail and office as sectors, in that the rental growth projections are still sat in a negative space or at least suppressed.
Rent expectations are also mixed across the more out of the ordinary commercial property and in the leisure sector. Given the disruption caused within leisure it is reported that hotels are showing the weakest forward looking projections for rents with some reporting a 5 per cent plus fall. But, like cold storage and logistics, rents for data centres and power provision are expected to be a strong consideration too.
So it’s a real mix, but not surprising. Is commercial property still a good investment for 2021″ For me it is, especially in many alternative sectors which weren?t as overt as they are now.
Banks and funders are still lending and, whilst some have tightened their LTV ratios, they are still supportive of the experienced property entrepreneur and developer.
Name: Gary Hemming
Position: Commercial Lending Director at ABC Finance
Bio: Gary Hemming has over 15 years” experience in financial services and specialises in bridging loans, commercial mortgages, development finance and business loans.
What costs have there been on businesses forced to navigate away from the office to remote working?
Remote working seems to be here to stay, but some businesses have really struggled to adapt. This isn’t always the fault of the business practices, some just rely on informal collaboration and this can become clunky when staff have to schedule video calls to do this.
“The impact can also hit employee wellbeing too, with the distinction from home life and work-life blurring. This can lead to feelings of burnout and never being able to fully switch off.”
Finally, although many businesses are managing to keep the wheels turning on a day to day basis, there are real difficulties around staff development and onboarding new staff.
Although online learning is simple enough to arrange, more specialist training around company-specific practices can be more tricky online and can be harder to follow.
This is also true of new hires, who miss out on valuable interaction with the team. A lot of learning can be done through shadowing experienced team members to ‘see how it’s done . This also makes asking questions in a more informal way difficult as relationships and confidence are often not as close as when people in close physical proximity.
Is commercial property a good investment for 2021?
Commercial property can be a very strong investment and often offer stronger yields than residential property investments. That said, the property chosen is key to success, with vast differences in quality between tenants and differing impacts from COVID on each industry.
For example, a local convenience store is likely to thrive during the pandemic, whereas a pub or non-essential retailer is likely to suffer longstanding lockdowns. This will create financial uncertainty and may lead to missed rental payments going forward.
A lot of the value in commercial investment properties come from the strength of the tenant and lease, so buying vacant property and then securing a tenant can lead to rapid increases in value. This should only be considered if you’re confident in finding a tenant quickly as you will be liable for the business rates while the property sits vacant.
