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On The Brink

On The Brink

09.04.20

A quarter of property deals on London’s commercial real estate market have fallen through in the past few weeks, in value terms, due to the Covid-19 lockdown.

That means £1bn worth of deals out of the £4bn under offer across London have been withdrawn since the UK government's lockdown began, according to Nick Braybrook, Knight Frank's head of London capital markets. A further £500m worth in deals have been paused. This leaves £2.5bn still under offer across the city.

The drop in commercial property deals is in sharp contrast to the post Brexit-boom at the end of last year – London clocked up over £4.6bn in deals in the fourth quarter of 2019, Knight Frank’s figures show, accounting for more than the past two quarters combined.

But the “absolutely electric” market across London, as Braybrook described it, was short lived as the wider markets were triggered into instability by the Covid-19 pandemic.

“There is so much uncertainty in the UK economy that we don’t know which companies are going to survive... we don’t know which companies are going to be there to pay their rent,” said AJ Bell’s Ryan Hughes, head of active portfolios.

Intu, a real estate investment trust with £10bn of assets including retail spaces across the UK, said on 26 March that it had received 29% of the rent due for the second quarter, compared with 77% for the same period last year.

As well as the market being unpredictable in terms of rental payments, interested buyers are unable to visit or survey properties, making purchasing decisions much harder. The inability to get valuations done, and deals on the back of that, even led some leading asset managers — including BlackRock and Royal London — to gate property portfolios altogether.

“Not much is happening because not much can happen,” Hughes said.

Time to review

Although some property experts see this standstill as temporary, others have said businesses will use this time to review the types of spaces they require. As a result, serviced office operators, such as WeWork or Regus, could benefit.

“We have seen further requirements and acquisitions be placed on hold this week, whilst they review the wider market implications of Covid-19,” said Dan Burn, lead director for Central London Markets at City agency JLL.

“But positively, many are still focused on a return to normality in the long run and so many of the strategic/lease event driven requirements are progressing with their preferred workspace to satisfy their long-term needs,” Burn said.

Hughes added: “Definitely at the end of this, there will be a reappraisal of society as to how we work and in what way we want to work, and one of those impacts could easily be on service officers and having a more flexible approach to office space.”

This could boost struggling firms like WeWork. Last week, the Japanese technology giant SoftBank pulled out a $3bn deal to buy shares in WeWork as part of a multibillion-dollar lifeline to save the property group from insolvency.

“As long as you can wait, then you should be OK,” said Neil Wilson, chief analyst at Markets.com.

He warned that anyone that needs to sell now will likely struggle. But even though the market has halted amid the crisis, this should help protect assets in some respects without too much damage to value.

“That’s important for investors in property trusts and individual property sellers. You have an argument that there’s pent-up demand — there’s genuine pent-up demand for assets like a new office block or a house.”

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