As lockdown restrictions ease across the globe, Jonathan Heaney, Sam Shires, Jon Le Rossignol and Fraser Hern, members of our dedicated Channel Islands Corporate, Banking and Insolvency & Restructuring teams respectively, consider what COVID-19 means for investment in UK commercial real estate through Guernsey and Jersey vehicles
2020 started strongly. Following a General Election result and a path forward for Brexit, we saw a significant uptick in UK commercial real estate acquisitions and disposals, together with the associated financing work. Jersey and Guernsey continued to be popular and commercially attractive jurisdictions in which to establish real estateholding and acquisition structures. There was particular renewed interest in the well-known holding vehicle, the Jersey property unit trust or JPUT for short. The JPUT remains a suitable vehicle for holding UK property despite recent changes to the taxation of gains for non-resident investors, and indeed we saw more evidence of the JPUT becoming the vehicle of choice for Far East investors.
Certain sectors boomed. The growth of the Build to Rent (BTR) sector continued unabated fuelled by the shortage of quality residential housing stock. In the commercial space, driven by the rise of on-line purchasing, warehousing and distribution centres (sheds) remained an extremely sought after asset class.
Many of the deals we were working on in Q1 managed to close despite the additional practical difficulties of all parties entering lockdown and moving to completions via electronic signatures. Understandably some transactions, in the development and retail space in particular, have stalled, expecting now to complete, subject to repricing, in H2 2020.
Inevitably, new acquisition and disposal activity has slowed whilst it is difficult, if not impossible, to price risk. We see our investor clients still very much in a "wait and see" mode.
Lenders also appear to be in a similar mode. With borrowers having had a little more time to digest world events, we are seeing many more requests to formalise amendments to facilities to, for example, reset covenants or push out maturities.
The events of the past few months have seen a certain amount of knee-jerk security enforcement, typically in relation to credits which were already under stress and which were unable to sustain the immediate impact of pressure from COVID 19.
The volume of such enforcements has not been material when compared against the size of the market. Lenders appear to be taking a measured approach to the circumstances they are facing, and not wanting to enforce (and risk crystallising losses) unless circumstances dictate that such steps are necessary. Secondary debt activity has increased, and credit funds are becoming more active in certain segments of the markets. This, plus a better understanding of what the pricing in a new normal might look like, is expected to fuel creditor activity. Pre-enforcement activity has certainly increased but so has activity on the borrower side, with boards of directors looking to shore up balance sheets as much as possible, having regard for the need to discharge their duties to the companies that they represent in what is, and what is likely to remain at least in the short term, a volatile environment.
For boards of directors, the lessons from the Global Financial Crisis as to how to ride out the storm are key.
The general sense from talking to a broad spectrum of clients (from investors to financiers and those who advise them), is that there is considerable latent risk appetite and abundant capital to act on it once certainty returns to the market. Sectors such as BTR that were already the target of significant investor interest will continue to attract interest. UK housing remains in crisis in a supply constrained market. The ever increasing population coupled with higher barriers to entry for home ownership will undoubtedly apply more pressure to the already creaking rental market.
Time will tell what the longer term impact of a socially distanced "normal" is. We view the demand for quality commercial UK real estate (and by association the offshore structures through which it is held) as being here to stay, albeit at a price that will be dictated by the yield that those in occupation can achieve in a new normal
Originally published 11 June, 2020
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