What will happen to Commercial Property?
In my last post I mentioned we were beginning to see some Green Shoots, particularly in Family Law, and Private Client law. This time I want to be a little more controversial and talk about one sector that I just don’t see coming back strong – Commercial Property.
The lockdown’s impact will affect business unevenly. We all know that hospitality and tourism/travel will be badly affected. Sadly, many businesses will go bust, and others may need to radically rethink their business model. However, if you were to make a long-term bet on those business coming back, your money would probably be pretty safe. People will always want to “socialise with friends” (accordingly to every other CV I read it’s most people’s only interest outside work!). People will still want to go on holiday.
However, if there is one sector, I wouldn’t put money on, it would be Commercial Property. I just don’t see it getting back to any sort of normal, any time soon.
Up until relatively recently investment in commercial property has boomed. Apparently, since 2000 the global stock of investable commercial property has increased to $32trn. It was seen as a nice safe investment, for long terms steady returns – just the thing for pension funds to invest in.
But I wonder if the pandemic, and the resulting lockdown, has changed all that.
First, tenants simply stopped paying rent.
From what I’ve read, around half of all shop and business tenants in the UK simply didn’t pay their quarter’s rent at the end of March. And it wasn’t just shops and restaurants – average hotel occupancy has dropped from 70% before the lockdown, to 15% in April. Office rentals have held up, with many tenants being able to continue to work remotely (but is that really a good thing for the landlord … more on that in a moment!). Suddenly that nice secure income stream doesn’t look quite so secure!
Secondly, and more critically, the lockdown has accelerated existing trends. Bricks and mortar retail was struggling before the lockdown, with more and more people shopping on line. Judging by the steady stream of packages being delivered to my door during lockdown (!), that trend has continued. This will continue, putting more and more pressure on traditional business models. Debenhams went into administration in April, and Intu, which owns a number of shopping centres in the UK, appointed administrators on June 23rd. Now, it appears Debenhams will continue in some shape, but only by because it “did a deal” with its landlords (although interestingly not Intu!) ….. I suspect that means they were pressured into taking a haircut on their rent! https://www.bbc.co.uk/news/business-52979759
Second, do we really think the office market will come back? There has to be a risk that businesses continue to work remotely, or at the very least more flexibly. Some commentators see a sharp downturn in high density urban office space. (https://www.moodysanalytics.com/videos-on-demand/2020/major-disruptions-ahead-office-sector). Indeed, at the Cashroom we have decided not to renew a lease on around 40% of our office space.
But how will it all pan out.
Bluntly, I’ve no idea. However, the problem that drove investment in Commercial Property in the first place has not gone away. Pension funds and insurers need a way to generate long term, secure income streams to meet their liabilities to pensioners. In fact, as we all get older, it will become more and more pressing. Government debt is not the answer. Interest rates at historic lows, with nobody (at least nobody I’ve read) predicting that will change any time soon. And the last attempt at solving the problem (collateralised mortgage debt) didn’t end well…!
So – how are we all going to convert out pension pots into secure income streams if Commercial Property isn’t the answer?
If anybody knows …. whisper it ….. we’ll make a fortune!
The Cashroom Ltd