The UK’s commercial real estate market is primed for imminent post-pandemic recovery despite being pummeled in the last 12 months, according to experts.
The Covid-19 crisis decimated the office market as workers and shoppers stayed at home amid a series of national lockdowns, according to new data from property advisory firm Bidwells.
Available London office space had steadily fallen since 2016, to sit at just over 3 million square feet in 2019. Following the pandemic, this more than doubled to 6.6 million square feet, the consultancy said.
However, the UK office market is set to witness an upturn this year, according to Edward Price, associate director at capital markets Middle East at property consultants Savills.
Offices are not being “dumped” as predicted
“While there is still a general idea that the role of the office will change… there’s less of a sentiment that offices will be just be dumped and everyone will work from home,” said Price, adding that demand for commercial real estate has risen in tandem with general UK economic sentiment.
British GDP growth rose 2.1 percent month on month in April, pointing to a broad-based pickup in activity. The reopening of school was an important factor in this rise, as was the continued steady recovery in retail sales, said a new Savills report.
The Savills All Property Prime Yield commercial property index was broadly stable this month at 5.20 percent.
Edward Price, associate director at capital markets Middle East at property consultants Savills
Monthly commercial real estate investment volumes this year are showing a steady recovery to within 10 percent of normal levels – with just over GBP3 billion recorded for the month of April 2021.
Industrial investment volumes to the end of April 2021 were up 110 percent up year-on-year, and retail warehousing activity up 87 percent.
All other segments remain down year on year, with the exception of unit shops which have been buoyed up by sales of long-leased assets such as banking halls and food stores.
Return to “normal”
Offices and leisure remain the quietest part of the market, with office transactional volumes subdued in particular in central London. West End office yields remained stable at 3.5 percent, while offices in greater London (M25) saw yields rise to 5.5 percent.
Based on Britain’s rising GDP and Google Mobility Data which shows rapid return to retail and recreation, mass transit and workplaces, Savills predicts “a return to normal levels of occupancy of retail locations and workplaces could come significantly sooner than many were expecting at the start of this year.”
“If we are right on this, then we expect that investor confidence in retail and offices will also improve in the second half of 2021, and this will be enough to bring overall levels of commercial property investment completely back to normal by the end of this year,” the property firm said in its latest report.
Price said there is “real value” to glean from the UK office market, particularly in central London
Given last year’s e-commerce surge during the pandemic, many investors are still pursuing logistics and warehouse opportunities but Price said there is “real value” to glean from the UK office market, particularly in central London.
In comparison, retail warehouse yields in April continued the gentle downward trend that has been seen over the last six months. The prime yield in that segment is now six per cent – 75 basis points lower than it was in September 2020.
“Flood to quality”
“Generally appetite for the office sector is still quite high. Middle Eastern investors generally look for yields of seven to eight percent which can be possible in this sector,” Price said, adding that he expects there will be a “flood to quality” as the UK market continues to open up.
“As the situation becomes clearer and overseas travel gets back to normality, that appetite will only increase,” Price predicted.
“While the logistics sector is still very popular, the majority of investors are finding it difficult to access because it’s competitive.”
International investors have also been attracted to the “long dated and stable nature of income” in the supermarket sector, Price added.
Dennis Chan, global head of international sales at Chestertons International
According to Dennis Chan, global head of international sales at Chestertons International, the pandemic was a call for investors to go “back to basics” and invest in supermarkets with yields of around 6 to 7 percent.
“Supermarkets offer a very reliable income, especially right now,” Chan added.
Opportunity to “revamp” dated offices
Faisal Durrani, head of Middle East research at Knight Frank, said he sees an opportunity for Middle Eastern investors to purchase and renovate “dated” office buildings.
“Covid has changed the definition of an office and what we do there – it’s no longer an email farm, it’s going to be a place for true collaboration,” Durrani said. “One of the key recruitment issues pre-Covid was around attracting talent. The way businesses were mitigating against this was securing best-in-class office space as a way to retain the best staff.”
Faisal Durrani, head of Middle East research at Knight Frank
As businesses reopen and bring staff back to the office, firms need to offer employees an environment that is safe, sustainable, well presented and digitally connected, he said.
“Around 64 percent of London’s office stock was completed before 2000. There is a lot of old tired stock out there – if it isn’t refurbished to a modern standard it risks being discounted entirely by businesses,” the Knight Frank expert said.
“There in probably lies one of the greatest investment opportunities in London – acquiring these brown buildings and refurbishing them. Your returns will be higher as businesses are willing to pay more to be in high quality space.”
Follow us on
