Real estate professionals in London fear that the government’s heightened coronavirus restrictions spell doom for any near-term economic recovery in the capital.
The government has introduced a package of new measures aimed at slowing the spread of Covid-19. Those include fresh rules around the opening of pubs and restaurants, as well as advice that anyone who can work from home should do so – just weeks after encouraging people to head back to the office. Brian Bickell, chief executive of West End landlord Shaftesbury, has called the government’s u-turn on that matter “disappointing”.
At asset manager Schroders, global head of real estate Duncan Owen says: “In the short and possibly medium term, the city of London is going to turn into a bit of a doughnut – nothing in the middle and lots of activity around the edges.
“Some [businesses] won’t be able to survive that,” Owen adds. “For the restaurants, cafes and shops that rely on London’s office workers, there’s going to be an increased number that will not be able to get through the next six months.”
Ros Morgan, chief executive of the Heart of London Business Alliance, says: “The measures introduced by the government will most affect the businesses in central London which rely on tourists and commuters.
“Since the announcement last night we have already seen a decrease in footfall in the West End since the same time last week and we believe this will only get worse as we head into the winter months and visitors and workers are less inclined to travel into the area.”
Simon Price, partner in the real estate group at law firm Mayer Brown International, says the change in emphasis on homeworking would “put a halt to the steady part-time return to the office that we were seeing”.
Several large companies, including Barclays and Lloyds of London, are reported to have told staff to work from home, rather than continuing with efforts to encourage people back to their desks.
“The time it will take to get more people back into the office will be more marked in areas like Canary Wharf and will put a real pressure on some retail and hospitality businesses that rely on a high number of people to come into work,” Price adds.
The industry has mixed views on what the latest developments mean for offices as an investment asset class.
Zachary Gauge, European real estate analyst at UBS-AM Real Estate and Private Markets, says: “It’s certainly harder to sell an office building that no-one is actually using, which is understandably discouraging some investors away from the sector. On the other hand, there remains a significant amount of capital targeting predominantly core offices, which may still need to be deployed before the end of the year.”
Could material uncertainty clauses be reintroduced by valuers? Gauge expects not.
“There is much greater understanding of the situation and the impact on real estate investment than we had back in March, and enough transactions have progressed in different office markets to provide evidence of post-Covid pricing,” he says. “Unless we enter another full lockdown, when physically buying and selling offices becomes nearly impossible, there should still be enough activity in the market to support the valuation process.”
Despite the grim prediction for London’s retail and leisure sectors and the capital in the short term, Owen believes that in the long term the capital’s office sector will prevail. The need for lower densities in offices will offset people only using offices part-time, he predicts, and could mean that net requirements by firms “may not be so different as people are speculating”.
Price expects a large amount of secondary space to hit the market next year as companies look to sublet spare capacity. But he believes headline rents will stay “fairly consistent” owing to a constraint in supply of larger office space.
In the view of Andy Bruce, partner and global head of real estate at Linklaters, the new restrictions will have less of an impact on the real estate sector than in March. “My sense is that the investment market has picked up momentum,” he says.
Seaforth Land founder Tyler Goodwin, however, believes the investment market for value-add assets will continue to be “anaemic” until a new pricing level for these types of properties is found. That will take time, he added, given that the economic impact of the pandemic likely has further to run yet.
To send feedback, e-mail louise.dransfield@egi.co.uk or tweet @DransfieldL or @estatesgazette
