The COVID-19 pandemic has had a profound impact on the real estate sector. Now, the industry is wondering if and how the market will bounce back. In this article we list our top predictions for what the post-COVID-19 world may look like for the UK real estate sector.
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There Will Be Tenant Casualties
Debenhams, Oasis, Warehouse and Carluccio's have all entered administration. These are businesses which were, reportedly, already struggling but the current circumstances have tipped them over the edge. These are the first, sadly, more are likely to follow. Landlords are still able to pursue statutory demands leading to winding up petitions against tenants who are in arrears. -
There May Be Landlord Casualties
The effects of this are unlikely to be restricted to tenants. Heavily leveraged landlords will likely find times increasingly hard as rent arrears and running costs mount whilst lending covenants are breached. Owners of sub-prime shopping centres, already suffering the effects of the squeeze on the retail markets may be particularly exposed. -
Business Rates Relief Will Be Welcome But Is A Blunt Instrument
No tax has had more bad press in recent years than business rates, with occupiers crying out for reform. The relief being offered to occupiers will be welcomed, though many will say it's too little too late and that the relief being offered is just as likely to benefit large occupiers who can well afford to pay as it will struggling smaller operators.
It's an open question whether business rates will in fact ever return to "normal" or whether this will be the catalyst for reform -
Hopes Of A Swift Uptick May Be Exaggerated
Much is being said of the hope of a swift "bounce" after restrictions are lifted. However, it is becoming increasingly clear that some levels of restrictions will likely remain in place for a very long time. This will doubtless have an impact on the pace of any recovery.
Revenue lost during the lockdown is truly lost, and will not return as soon as the doors to restaurants and shops re-open. Both the ongoing restrictions and the likely reluctance of people to simply return to old habits will all mean that revenues will likely be slow and may not return to normal for some time. -
The Real Estate Sector Is Going To Have To Work Together
As restrictions are lifted, landowners, occupiers and funders will wake up to much higher debt levels than that which they had before the lockdown. Tenants are not suddenly going to have the cash to pay rent arrears, and landlords are not suddenly going to have the cash to repay their funders.
All stakeholders are going to need to work together for the benefit of each other in order to weather this storm. As soon as any cog in the wheel starts to look to its own needs, things will start to break down very quickly. All stakeholders need each other. -
Substantial Debt Relief May Need To Be Considered
Whilst some landlords are giving some rent free periods, many are simply offering deferrals and others have yet to commit. If recovery is slow, then simply deferring arrears, even over a year or more may in and of itself be unaffordable for tenants.
Given the domino effect this will have on landlords and then funders, it would not be surprising if some form of debt relief for the sector were not at least mooted. -
Tenants Will Be King
Retail landlords in particular must be prepared for aggressive renegotiation.
Retailers will likely take the view that they will have a pick of available space open to them as voids mount. As the trend for Retail CVAs showed in the last two years, retailers are perfectly willing to take drastic action to reduce their property costs.
Using their new found position of strength, we can expect big high street names to come up with aggressive demands to their landlords, under the threat of walking away from the lease, using, if necessary, insolvency processes. -
Serviced Offices May Not Be Dead Yet
Towards the end of 2019, the sector was wondering whether the serviced office bubble had burst. This situation may provide a shot in the arm to that part of the industry. With occupiers looking at uncertain times, the flexibility offered by the serviced office model may become ever more attractive to businesses looking to keep cash flows flexible and commitments low. -
Residential Landlord And Mortgage Providers Will Be Put Under Pressure To Give Lengthy Forbearance To Their Debtors
Housing and eviction was a hot topic even after the 2019 election. It is likely to remain a big issue now. With the news that 1 in 9 mortgages now has some form of mortgage holiday, it is likely that significant pressure will be applied to mortgage lenders not to seek to recover arrears too swiftly, and to forbear from taking enforcement action that might lead to repossession.
Residential landlords will also likely be pressured to provide greater assistance to tenants in arrears following the temporary restrictions on repossession actions. -
There will be opportunities
Voids will no doubt increase over the next 12 months and it may be that some prime sites will become available, either for occupational tenants or for potential redevelopment.
Developers with cash reserves are already gearing up to sniff out opportunities in the market. -
The Planners Have A Unique Opportunity To Change Our Town Centres – If They Can Be Brave Enough To Take It
Following on from the last prediction, with much debate over recent years over the decline of the High Street and how to ensure that our town centres remain attractive and useful spaces for the community – development opportunities may be further increased if town planners are able to grasp the opportunity to make real and meaningful changes to how our town centres feel and operate.
Central Government will need to get involved to provide funding to local authorities to properly resource planning departments and the extension of permitted development orders will need to be considered to allow for flexible and speedy redevelopment.
For more information or advice, please get in touch with your usual Clyde & Co contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
