While Covid-19 at its core is a public health crisis there is no doubt that the resulting global pandemic and economic fallout has left the real estate industry with much to ponder over the last few months. Clearly there are many inter-connecting variables at play to consider, including how long we will require to live under some form of lockdown, absent a vaccine, as well as how human behaviours may need to adapt as a result. But, fundamentally are we living through a period of time that we will all look back on as one of transformational shifts, or simply one which triggered the acceleration of certain trends that were already in evidence ahead of the Covid-19 crisis?
With swathes of the UK population working from home, and many of whom discovering the benefits that go along with it, it is highly plausible that we will soon see an acceleration in the growth and availability of flexible office providers. Large corporates will be looking closely at the efficiency of their existing office layouts and, rather than committing to new wholesale office expansions or relocations with the associated capital expenditure, we may well see an increasing use of short-term and flexible office solutions emerging in the market. The introduction of social distancing will inevitably lead to a greater emphasis on the layout of offices and how interaction between teams can be accommodated safely. There will also be increased demand for new workplace design, including more digital, flexible, and health-oriented working.
Retailers will need to re-think their physical infrastructure. While the sector was already in the midst of a general restructuring, we are likely to see retailers focusing much more aggressively on their online offerings and supply chains. Retailers without the physical infrastructure to process online sales quickly and effectively will undoubtedly start to lose market share. Primark, for example, has struggled to cope in the absence of an online presence. Strengthened relationships between landlords and tenants will emerge with shorter leases, turnover rent arrangements and more regular breaks being negotiated. Perhaps we will see the repurposing of out of town retail parks where stores will be able to more easily accommodate social distancing and ‘click and collect’ operations driven by the shopping publics’ reluctance to join crowded places in city centres.
The Coronavirus pandemic has prompted many businesses to build more resilience into their supply chains. As a nation, we are likely to see more domestic procurement of medicines, pharmaceuticals, and other healthcare products to ensure we are prepared for subsequent waves of the virus. There will also likely be a growing demand amongst the public and politicians to be less reliant on overseas manufacturing, with greater emphasis placed on resilience and less on cost. This will likely drive an uptick in manufacturing activity in the UK and consequently the continued growth of the logistics and distribution sector as an investment, development, and occupational sector. Coupled with the simultaneous contraction of the retail sector and the continued growth in sales online, this is the one sector well placed to derive significant benefit from the change in societal, working and shopping patterns being driven by the impacts of Covid-19. In the middle of a pandemic, real estate in the logistics sector has never been more important.
With travel bans, lockdowns, and social distancing in play for some considerable time, it is likely that this is the one sector which will suffer the greatest impact over the medium term. To recover to anywhere near the pre-virus levels of economic activity new trading formats will need to emerge in the hotel, leisure, pubs and clubs sectors where there is less emphasis on international flying and a greater acceptance of the need to avoid crowded places. It seems inconceivable that human behaviours will not need to be adapted to avoid large groups and crowded places. In fact, some of these types of behaviours to force the avoidance of public areas is likely to be mandated by Government.
5. Capital Markets
A flight to quality seems inevitable and will accelerate as investors (both overseas and UK) seek protection in longer income and better covenant strength in their tenant profile. As economic activity and consumption contracts we are especially likely to see continued pain in the retail sector where weak covenants and operational models will be further exposed. The retail/shopping centre sector was being restructured prior to the virus and insolvency events in that sector at both landlord and tenant level are likely to be accelerated over the next 12 to 18 months. Travel bans and social distancing will limit overseas investors in the UK, if for no other reason than due to the practical aspects of being unable to view a property and transact the required diligence. While there are clear short-term negatives, in the medium term it is undoubtedly the case that real estate as an investment class remains an attractive proposition. UK property yields look attractive when compared to other investments and asset classes. While corporates are withholding or withdrawing dividends there is an argument that rental income in some property sectors remains relatively resilient. There are businesses in sectors such as logistics, healthcare, pharmaceuticals, and financial and professional services, who will see their income hold up at reasonable pre virus levels given that some have not been impacted at all and others have been able to adapt their business models to remote working with relative ease. The office sector could, for example, remain an attractive proposition given there are low vacancy rates and a constrained development pipeline in various parts of the UK.