WATCH London is caught in the middle of a perfect storm, buffeted by the twin headwinds of Covid-19 and Brexit.
The impact on the real estate investment market has been devastating. Savills recently stated that investment volumes had fallen by 46% from last year, amounting to just £4.4bn.
But is it faring worse than other markets? And can it recover?
Speaking as part of EG’s Future of London event, PGIM Real Estate chief executive Eric Adler says yes, it is. And also, yes it can.
“As an investor we felt that, pre-Covid, London was really starting to turn a corner after some of the quietness in the market caused by Brexit,” he says.
Rental levels were hitting all-time highs, demand for office space was more than equal to the growing development pipeline, and investment volumes were breaking records.
And then came the worst pandemic in living memory.
“Covid really knocked London for a loop,” says Adler, the American boxing term painting the picture of London on its back, stunned as the referee starts counting. In fact, Adler argues, it has been hit harder than most of the other cities that PGIM Real Estate invests in, “particularly some of the European and Asian cities”.
Part of the blame for that lies with central government, Adler politely states. There were “a lot of changes in messaging”, he says, especially in the early months. That has now resulted in far greater caution in the population. Adler points to the disparity between the percentage of Europeans returning to their offices when told it was safe to do so, and Londoners. “When you compare the numbers, you can see the knock-on effect of that. London is much more like cities in northern America.”
But the impact of novel coronavirus has not presented the city with entirely novel problems. “Covid is just accelerating a lot of phenomena that we were seeing pre-Covid,” he insists. “We are still going to work more from home, we are going to travel less for business and we are going to shop more online.”
Melanie Williams, head of real estate sector and a partner at DWF, who joined EG for the panel discussion, agrees. “Covid is not the main problem now,” she states. “The main problem is home working.” The inevitable result, she says, will be significant “repurposing” of that office space, which will ultimately hit investment.
The short-term result, says CC Land’s UK head, Adam Goldin, who also joined the panel, is that a lot of grey space will be pumped into the market. But, he says, much of that will be reversed as occupiers reconsider whether they really want to move away from the office and owners realise that values are creeping up.
Even this year, in the grip of the pandemic, hasn’t been so bad, he says. Yes, 2020 was 46% down on 2019’s investment. “But that does mean that we have done 54% of the transactions we did last year, despite everyone working from home, so that’s not all bad!”
Which brings us to Brexit. With the threat of no-deal resurfacing in recent weeks, Brexit is “back to centre stage”, Adler says. “That creates a lot of nervousness.”
And we have already seen some effect on the City market. Nearly 10,000 jobs have been lost to the capital as a result. “That’s big in real terms, but when you look at it in terms of London as an office market, it is digestible.”
Back on its feet
Indeed, Adler argues that Brexit may actually help London to find its feet once it starts to recover from coronavirus. “Covid has accelerated deglobalisation,” he says, and the fact that London is already thinking in those terms owing to Brexit may give it a competitive edge.
Asia may prove London’s greatest ally. It is, Adler says, the region that is recovering from Covid most quickly. More importantly, Covid is accelerating the growth of Asia in terms of its weight in the global economy, and that is going to be a good thing for London, which has always been a favourite target for Asian investment.
The drop in international buyers this year has been a result of practical difficulties, not lack of appetite, says Mayfair Capital’s Tim Munn.
“Uncertainty and disruption creates opportunities,” says Munn. “And we are certainly seeing those opportunities.”
The fact is that London’s credentials remain strong, says Munn. “It still has the education, the housing, the employment rights and the infrastructure that make people want to live, work and invest in London.”
And much of what appears to be lost will come back, Adler asserts. “Once the dust settles, people will want to come back here.” The retail, hospitality and entertainment will follow. And so will the desire for workspace.
Adler is pleasingly optimistic. “Once that settles down I really think London will come back as one of the most important places for investment.”
After all, history tells us that London is resilient, Williams adds. “This isn’t new. The Spanish flu, the plague. There were similar reports that the city was dead then, and then everyone went back.”
