The effect of COVID-19 on the UK real estate sector is too early to fully assess as this will mainly depend on the severity, extent and duration of the current outbreak. However, we can look at the key trends relating to each asset type:
Industrial properties have been a top-performing real estate sector but, though still early, COVID-19 could cut into returns. The issue for owners of warehouses is whether supply chain disruptions cause credit quality to deteriorate, resulting in an increased default rate, prolong voids and rent arrears. However, interruption in the supply chain has been transitory historically. COVID-19 will cause a pause in demand and impact the velocity of expansion and new leasing, but we expect to regain momentum as fears over coronavirus pass.
Recommendations about social distancing with health experts suggesting that crowded areas are avoided meant significant contraction in footfall in fashion, food and beverage and leisure sectors over the last couple of weeks. On 20th March Boris Johnson announced that cafes, pubs and restaurants must close from Friday night (except for take-away food). Despite the government announcement to pay 80% of wages for employees who are not able to work (up to £2,500 a month) and business rates reliefs, this crisis may lead to a shake-out of failed small retailers. This could, in turn, see a long-term reduction in demand for retail space that will take time to claw back.
Telecommuting has undoubtedly increased in the past few years. However, with an increased number of employers encouraging their employees to work from home during the outbreak, employers are getting an unexpected preview of what a significantly smaller office footprint could look like in the future. If the technology companies can facilitate a work environment outside the office that delivers results for employers during this outbreak, then expect demand for smaller office footprints to accelerate as a result of the Coronavirus.
In contrast, co-working spaces demand may significantly decrease with people trying to practice social distancing in the office environment. Thus, the allure of leasing space in a co-working environment could diminish. There is a big challenge ahead of co-working spaces operators to innovate to attract and retain new tenants.
Coronavirus precautions associated with social distancing measures had an impact on property viewings with estate agents reporting vendors & tenants being concerned about those coming to view their homes and purchasers worried about viewing homes as occupiers might be at risk or infected. Concerning Landlords and homeowners, the government has announced a 3-month mortgage payment holiday, that will be extended to landlords whose tenants are experiencing financial difficulties due to the virus outbreak. This measure aims to alleviate the pressure on landlords and tenants. However, borrowers wishing to accept a 3-month mortgage holiday from their bank need to be fully aware of the impact on their mortgage payments and the length of their term.
Concerning the rental market, Landlords may face increased rates of arrears if tenants are unable to pay rent because of business disruption or infection. On the 18th March, the government announced measures to protect renters affected by Coronavirus where Landlords will be unable to proceed with evicting tenants for at least three months.
Although it may seem that this pandemic may not have a significant impact on the real estate sector, a closer look suggests that it may have a far-reaching impact. We expect that the real estate industry, from office to retail to industrial, may see changes regardless of whether the Coronavirus is short-lived or is here to stay.