6 minute read
UK BAROMETER
Braving a new world
The double whammy of Brexit and COVID-19 have certainly shaken the UK real estate market. But the fi rst green shoots are starting to emerge, writes
Graham Parker
Nuveen Real Estate’s St James Quarter in Edinburgh, a shopping galleria anchored by John Lewis THE UK real estate market has endured its most turbulent year in living memory, reeling under the twin blows of the pandemic and Brexit. But while the broad picture has been bleak for real estate investors and operators, surprising pockets of resilience have emerged. The COVID-19 pandemic has left the UK with one of the highest per capita levels of infection and, sadly, deaths, in the developed world. However, through 2021 the rapid roll-out of a mass-vaccination programme allowed an early relaxation of restrictions, with shopping centres, workplaces and leisure destinations once again fully open by the summer. But all the indications are that the UK real estate sector will face a long road to recovery. For landlords, the biggest challenge has been the loss of rental income as tenants either went out of business or took advantage of a government-imposed moratorium on evictions to simply stop paying rent. “Nowhere else in the world has the property industry been subject to such punitive measures by a government,” says Melanie Leech, chief executive of the British Property Federation. “The billions of pounds looking to invest in UK real estate will be watching our government’s actions closely.”
The problem was particularly acute in the retail sector, with shopping centres locked down for long periods. British Land, for instance, was unable to collect 29% of the rents due on its retail assets in the year to March 2021. As a result, profits fell by 34% and the value of British Land’s retail portfolio fell by 25%.
However, the problems are not restricted to retail — the office market faces challenges too, especially in central London where, according to Deloitte, supply is soaring at a time when leasing activity remains subdued. The firm’s annual Crane Survey shows more new office
space will be delivered in London in 2021 than at any time since 2003. A highly visible reminder of this is AXA’s 22 Bishopsgate, the City of London’s tallest building and, at 1.25 million sq ft (116,000 sq m), its biggest single block of office space. The building welcomed its first occupiers during the first quarter of 2021 and is now 60% let. Despite the surge in availability, Deloitte director Michael Cracknell sounds a note of cautious optimism. “COVID-19 restrictions and homeworking have inevitably had a considerable impact on central London office leasing, with many businesses adopting a ‘wait and see’ approach before committing to new office space,” he says. “An increase in leasing transactions and the higher level of active requirements in the last couple of months suggests, however, that the leasing market could be over the worst now.” And Cracknell also sees signs of confidence returning in the capital markets: “In the investment market, travel restrictions made deals difficult to get over the line. As those restrictions now ease, there is a growing expectation that investor appetite will build, with pent-up demand likely to lead to a period of sustained activity.”
In a sign that London occupiers may be prioritising flexibility over location, in January 2021, the British banking and financial services company Standard Chartered signed a global deal that will enable the London-based organisation’s 95,000 employees access to 3,500 IWG offices around the world. This will give them the option to work in more convenient locations closer to home while benefiting from professional office facilities. IWG CEO Mark Dixon says firms have been taking “a gradual step towards hybrid working” but Standard Chartered was moving to a more “radically employee-centric approach”. He adds: “One of the biggest pain points identified by workers globally is the commute and Standard Chartered – by acknowledging the importance of helping employees achieve a better work-life balance as well as significantly reducing their carbon footprint – is demonstrating a modern, forward-thinking outlook, that shows they are in touch with their people’s needs.”
Equally in the retail sector there are signs of increased leasing and investment activity. But in both cases, the buzzword among agents and investors is ‘rebasing’ — an acceptance that rental and capital values have fallen permanently. A case in point is the Touchwood shopping centre in Solihull, which serves a wealthy catchment to the south of Birmingham and is considered one of the sector’s stronger assets. US-based real estate investment manager Ardent Companies has bought Touchwood from Lendlease at a price reflecting a reported 10% yield.
As AXA found with the 22 Bishopsgate scheme in the office sector, mega-projects have a momentum all of their own and developers cannot simply turn off the supply tap when the market moves against them. In the beleaguered retail sector, the biggest opening not just of 2021 but for half a decade has been Nuveen Real Estate’s St James Quarter in Edinburgh. An 850,000 sq ft shopping galleria anchored by John Lewis forms the first phase of the 1.7 million sq ft scheme, with hospitality and residential elements set to complete in further phases through to 2022. Martin Perry, Nuveen’s director of development for St James Quarter, says: “The impact of the pandemic has, of course, had a profound impact on UK retail. However, retail required a rethink long before the pandemic. The high street was already changing, which is why we have been continually working with our partners, retailers and the city as whole to ensure that the St James Quarter continues to be enjoyed by generations to come.”
However, the very forces that have challenged retail have benefitted the logistics sector as UK consumers took to shopping at home in ever-growing numbers. At the end of the second quarter of 2021, online accounted for 39.3% of all UK retail sales, according to KPMG and the British Retail Consortium. This has driven demand for warehouse space to new highs, as retailers set up new online distribution networks to fulfil online orders. Colliers calculates that, in the second quarter of 2021, take-up for units above 100,000 sq ft reached 16.1 million sq ft. This is up 42% year on year and a new record for the sector. Developers are struggling to keep up with demand and Colliers says the availability of distribution space is at an all-time low, which is driving up rents. Responding to this, Tritax Big Box REIT is developing the UK’s first ‘mega box’ logistics facility — a 2.3 million sq ft three-storey unit on the south bank of the Thames at Dartford beside the M25 motorway. It has been pre-let to Amazon on a 20-year lease. Tritax CEO Colin Godfrey says: “Recent macro events are accelerating substantial tailwinds for our business through the ongoing adoption of e-commerce platforms as consumers increasingly shop online.” n
GEO FOCUS
11.15 > 12.15 | Workshop Room - Palais 3
UK: BACK TO BUSINESS
CONFERENCES & EVENTS AT MIPIM
WEDNESDAY 8 SEPTEMBER
Join your peers to debate the UK post pandemic and brexit and explore the fortunes of different asset classes, cities and regions. A new fresh approach to our geo focus sessions this year. There will be a special emphasis on networking face-toface after such a long break from us being able to do so. This session will be a mix of opening keynotes followed by roundtable discussions to encourage much more networking inspired by content of most interest to you. Participants will be entering the room and choosing a table topic of their choice.
Mark DIXON
Founder & CEO IWG
Lord Gerry GRIMSTONE
Minister of State for Investment Department for International Trade
MODERATOR Sebastian SHEHADI
Political editor and senior editor Investment Monitor
