ritish real estate was already in deep turmoil before the pandemic. M&G’s retail-heavy flagship £2.5bn Property Portfolio halted redemptions in the final days of 2019, and shopping centre owner Intu entered crisis talks in January, in a prelude to its June insolvency.
While many saw the long-term crisis in UK retail property coming, following the closure of more than 5,000 stores employing almost 100,000 people in the prior two years, none predicted the shutdown of London and the UK’s other major cities.
As late as February of last year, property manager Knight Frank issued a report dedicated to the coming ‘crunch’ in the supply of London office space, despite almost four million square feet reaching the market in 2019.
Speaking off the record, some sector veterans suggest that as much as a third of office space in the capital may now be surplus to requirements. However, with letting markets largely frozen, much of the potential change has yet to be reflected in the market.
In prime West End and City, yields are so far largely unchanged, although outside the capital and lower down the value chain they have blown out by between 25 and 100 basis points, according to CBRE’s UK yield monitor, even as benchmark rates have cratered.
Shopping centres and high streets may offer a better guide to the sort of long-term structural shift to be found where space is now genuinely redundant, with yields blowing out 250bps over the year, from already distressed pricing.
‘The pandemic really hit at the heart of real estate,’ said Rick Romano, managing director and head of global real estate securities at PGIM Real Estate. ‘We had shopping malls and hotels closed, offices were shut down. That had a big impact on real estate, and at one point [in 2020], we saw real estate investment trusts down 40% for the year.’
Since then, however, there has been a ‘bifurcation in the collective property market’, as he puts it. ‘We had property types that either benefited or were less impacted by the pandemic – versus those that were directly hit by the pandemic.’
Real estate sectors that support the digital economy, especially data centres and mobile infrastructure, have enjoyed a burst in demand, while healthcare demand has also been boosted.
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