29 April 2020 | Comment | Article by Simon Levine
The commercial and residential property sector has been severely affected by the coronavirus. And, as the UK capital, London is certainly sharing that pain. It’s also coping with its own unique set of challenges.
As lawyers, based in the heart of the City, we work shoulder-to-shoulder with the sector. Here are some of the common themes we’re witnessing right now:
- Foreign Investment in Residential Property
We’ve seen a reduction in the number of Middle East-based individuals acquiring residential property in London – who’ve previously secured funding from Middle East-based banks.
Many of these people were previously using finance to purchase newly built flats in London - in particular along the banks of the River Thames. This area of work had been adversely affected by Brexit and the view was that it would begin to pick up after the election in December 2019.
The advent of the coronavirus is likely to produce even further delay in the recovery of this type of work, especially as the virus is a worldwide phenomenon. Investors may also anticipate that residential property prices will fall over the next year or so - especially given the volume of new-build flats which have been constructed along the banks of the River Thames.
There‘s been something of a rush by landlords to seek advice on the options available to them since March as a result of tenants not paying the full amount of the March quarter’s rent. At the same time, many tenants have quickly approached their landlords seeking some form of rent concession or even rent abatement. Although there’s always a desire to resolve issues promptly, some landlords are adopting a “wait and see” approach. Their response may depend on when they consider the lockdown is likely to be relaxed and the sector in which their tenants operate.
Novel methods for requiring something in return for a rent concession are being considered including removing break clauses from leases, extending lease terms or increasing rent payments in the latter quarters of lease terms.
Landlords’ hands are currently tied by newly introduced restrictions which prevent forfeiture of leases for non-payment of rent for 90 days from 27 March.
- Self-Storage and Warehousing
With most self-storage facilities still open to private customers, this sector appears to be weathering lockdown in a fairly robust manner. With commercial users, such as London Ambulance and the wider NHS, using some sites, these facilities are still operating at near full capacity.
Sites, particularly on the fringes of the M25, are busy as many people take space for bulk storage and warehousing. Indeed, given the further surge of online shopping during lockdown, warehouse facilities are much in demand and many operators anticipate this to continue once lockdown is gradually lifted.
Smaller self-storage sites, which also incorporate flexible working offices, have had lower volumes of occupancy recently, with some “licensees” attempting to exit flexible commercial contracts or request reductions in fees payable.
Developers and investors remain optimistic about this sector post lockdown, as it’s generally considered not to have reached market saturation in the UK.
- Hotels and Leisure
Clearly with most hotels, bars and restaurants being closed due to the pandemic, this sector is suffering more than most. Indeed, the Chief Executive of UK Hospitality was recently quoted as saying that a lengthy lockdown could lead to a “bloodbath” for the sector - with the June quarter looming large. On a more positive note, some hoteliers are offering empty rooms to key workers and the homeless.
There are also signs that international investors are still keen to invest in the London market, with the recent acquisition of the London Ritz by a Qatari investor. There is also much speculation that many former retail sites will be repurposed for entertainment and leisure post lockdown.
- Strategic Land Promotion
Strategic Land Promoters have been hit hard, with many employees currently on furlough. It has proved difficult for many land directors to visit prospective sites, as this typically involves accessing land owners’ homes and engaging in face to face meetings.
With local authorities either meeting less frequently, by video conference or not at all, even existing schemes are progressing through the planning system more slowly than usual.
Post Lockdown Forecasts
It’s certainly a mixed picture for London Real Estate. Most forecasts point to a 50% drop in residential transactions over 2020 - even if there is a partial lifting of restrictions.
Any return to normality will be slow in the residential market, with first-time buyers especially hard hit given their reliance on low deposit, high risk, mortgages that some lenders appear to be withdrawing.
Any rebound in the hospitality and leisure sector will depend largely on consumer sentiment and a return to normal levels of tourist arrivals in the Capital.
The warehousing and storage sector may well prove to be more resilient, given the apparently exponential growth of on-line shopping and an insatiable need for private and bulk storage.
About the Authors
John Hussey is a Partner in the Real Estate department of Hugh James in the London office. John acts for commercial and residential developers and strategic land promoters. He also acts for hoteliers, restaurateurs and high net worth individuals in the acquisition and sale of real estate assets.
Simon Levine is a Partner in our London office. He specialises in all aspects of commercial property, including landlord and tenant and secured lending as well as dealing with high-end residential work.