Land­lords seek sil­ver lin­ings in age of re­mote work­ing

Covid-19 has up­ended the world. In part 2 of a 10-part se­ries, Rachel Mil­lard takes an in-depth look at the ram­i­fi­ca­tions for com­mer­cial prop­erty

The Daily Telegraph - Business - - Business -

‘The cri­sis has prob­a­bly ac­cel­er­ated the de­cline of the high street by about five years’

Five-hour queues to get into a Pre­ston branch of Sports Di­rect on the first day that shops re­opened fol­low­ing lock­down owed much to the 50pc dis­count for NHS work­ers – but also of­fered a glimpse into the fu­ture.

Edge-of-town sites such as the Deep­dale re­tail park that boasts the in-de­mand Sports Di­rect are a rel­a­tively bright spot in a tale of bricks-and­mor­tar de­cline.

The trend has picked up dur­ing the pan­demic. Whether it will en­dure is among the many ques­tions fac­ing com­mer­cial prop­erty land­lords.

Coronaviru­s has touched most cor­ners of the sec­tor, emp­ty­ing out of­fices, shops and restau­rants as peo­ple seek refuge at home. There are dan­gers in ex­trap­o­lat­ing too much about the fu­ture from the depths of a cri­sis. But it’s clear that habits are un­likely to snap back any time soon, given rolling lock­downs and so­cial dis­tanc­ing.

Tec­tonic plates are shift­ing in a sec­tor that was al­ready be­ing rocked by the shift to on­line shop­ping.

“It will take a sig­nif­i­cant drop in in­fec­tion rates, most likely through phar­ma­ceu­ti­cal in­ter­ven­tions, to exit this sec­ond phase of con­tain­ment and for life to re­turn to some­thing like nor­mal,” wrote Aviva In­vestors’ prop­erty fore­cast­ers Jonathan Bay­field and Chris Ur­win at the end of June. Long be­fore coronaviru­s, the gen­er­a­tional shift to on­line shop­ping was up­turn­ing con­ven­tions, turn­ing unloved in­dus­trial ware­houses into prime prop­erty to store goods for on­line sales. It made he­roes out of the likes of David Sleath, FTSE 100 ware­house owner Se­gro’s chief ex­ec­u­tive, pic­tured, but heaped mis­ery on to the likes of shop­ping cen­tre backer John Whit­taker. The col­lapse of his key in­vest­ment Intu in June, weighed down by its £4.5bn debts, starkly il­lus­trated how coronaviru­s has ac­cel­er­ated that shift. Weeks be­fore Intu’s col­lapse, Se­gro raised £680m on the stock mar­ket to snap up as­sets.

De­mand for ware­house space is only set to strengthen, as on­line shop­ping grows at pace and su­per­mar­kets bol­ster their lo­gis­tics oper­a­tions.

Cap­i­tal val­ues in the ware­house space have re­mained largely un­changed, set against steep falls for re­tail prop­erty on the high street and in shop­ping cen­tres.

“Over­all in in­dus­trial what’s been the high street’s loss has been the in­dus­trial sec­tor’s gain,” says one lead­ing fund man­ager. “The cri­sis has prob­a­bly ac­cel­er­ated the de­cline of the high street by about five years.”

There is a nat­u­ral check, how­ever, on de­mand for ware­house space. “The de­mand means that yields are be­ing pushed down to lev­els that, for us, we think in some cases there could be a risk to per­for­mance rel­a­tive to oth­ers,” says Nick Mont­gomery, head of UK real es­tate in­vest­ment for the as­set man­ager Schroders. In the mean­time, re­tail land­lords are try­ing to cap­ture some of the growth in on­line sales.

Ham­mer­son, for ex­am­ple, which is mov­ing to­wards more turnover-linked rents, is think­ing about mea­sur­ing the num­ber of shop­pers both in­side and just out­side of the store, to feed into rent cal­cu­la­tions. The FTSE 250 land­lord started sell­ing its of­fice space in 2012 to fo­cus on re­tail, mean­ing it at least does not have to worry about the trend to­wards work­ing from home.

That is clearly turn­ing from an emer­gency mea­sure into a more per­ma­nent shift, with City in­sti­tu­tions in­clud­ing Schroders, M&G and PwC now al­low­ing work­ers long-term free­doms not to be tied to the of­fice.

Darken­ing eco­nomic clouds are likely to tip the scales fur­ther to­wards work­ing from home. Of­fice space in cen­tral Lon­don costs most em­ploy­ers in the re­gion of £10,000-£15,000 per per­son per year, ac­cord­ing to Aviva.

UK of­fice take-up fell 37pc dur­ing the first half of 2020 com­pared to the same pe­riod in 2019, ac­cord­ing to data from the es­tate agent Sav­ills, with a 41pc fall in Lon­don. Va­cancy rates in the cap­i­tal are also ris­ing.

Some big deals have gone through in the last cou­ple of weeks, how­ever, such as Bail­lie Gif­ford’s re­lo­ca­tion to a 280,000 sq ft base in Ed­in­burgh.

Rents are largely hold­ing up. Land­lords stress it’s a mis­take to write off the of­fice. Many em­ploy­ers are even keener on high-qual­ity build­ings with plenty of space for col­lab­o­ra­tion, where work can take place at min­i­mal risk of spread­ing the virus.

Ten­ants are said to be tak­ing a step back to think about the space they need. “A lot of com­pa­nies who have a re­quire­ment [such as a lease ex­piry] com­ing up are just paus­ing and think­ing, how is this go­ing to af­fect the type of space we want next,” says Dar­ren Richards, head of real es­tate for Bri­tish Land, which has £9.2bn of of­fice as­sets un­der man­age­ment, fo­cused on Lon­don.

“Not whether they want space fun­da­men­tally, but whether this changes what they need and how they use it.”

He adds: “Even dur­ing the lock­down pe­riod we’ve seen en­cour­ag­ing in­ter­est in big chunks of space. This demon­strates that some firms with large re­quire­ments are al­ready look­ing past Covid.”

Among the unan­swered ques­tions so far is the ex­tent to which of­fices will move out to the sub­urbs to be closer to work­ers’ homes.

The smart money, mean­while, is fol­low­ing those com­pa­nies that are do­ing well out of the pan­demic, such as the tech gi­ants. “We try to fo­cus on towns and cities cap­tur­ing de­mand from the grow­ing parts of the econ­omy,” says Mont­gomery from Schroders. “There will be win­ners and losers. In our view, the death of the of­fice is grossly ex­ag­ger­ated.”

‘There will be win­ners and losers. In our view, the death of the of­fice is grossly ex­ag­ger­ated’

To­mor­row: Part 3 – How the pan­demic has rad­i­cally al­tered the flow of money

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