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Banks, Lenders & Investors Business Development & Marketing Finance General Turnaround

Is commercial property investment no longer a safe haven?

commercial property a safe investment?Commercial property pre-pandemic was considered one of the more secure options for money by investors, particularly by pension fund managers.
But the consequences of changing consumer behaviour, the aftermath of the pandemic lockdown and the retail High Street revolution would suggest a pause for thought and perhaps a rethink.
While the most obvious sector of business related property to be in trouble is retail it may prove not to be the only one.
Retail has been hit by a significant move to online shopping that has been building for several years, but it is also beset by what has been called an archaic rental collection system, whereby rents are payable quarterly.
The most recent Quarter Day was on 24th June (Midsummer Day) and it has been estimated that in the region of just 14% of retailers were paid their rent that day.
It was no surprise, therefore that Intu, owner of some of the UK’s biggest shopping centres, such as Lakeside and Manchester’s Trafford Centre called in the administrators the day after the Quarter Day.
Intu had been struggling even before the lockdown as a result of a list of store closures announced throughout the year so far, including well known names such as Warehouse, Oasis, Monsoon, Quiz, Pret A Manger and others. It has been estimated that in excess of 50,000 jobs have been lost in the sector so far.
The lifting of lockdown in retail is not likely to help to restore the High Street’s fortunes given the restrictions and limitations shops have had to impose to ensure customers are safe from infection.
But commercial property is not only about retail.
Lockdown meant that many businesses had to close their offices and again, they have only been able to re-open amid considerably changed circumstances for safety reasons.
Not only this, but many previously office-based businesses have discovered that their employees can work efficiently and often more productively from home and have therefore they have been reviewing their business models to enable employees to carry on working remotely.
Where they have a need for some employees to be in the office at least some of the time, they have introduced rigorous sanitisation measures, abandoned such practices as hot desking, installed safety screens at more widely-spaced desks and introduced flexible working so that employees no longer have to arrive or leave at the same time. Much of this is aimed at helping staff avoid travelling on crowded public transport but it is  also a recognition that flexibility is benefitting both employers and employees.
The trust issue assumed by management has also largely been allayed; indeed staff have tended to work harder at home than they did in the office with few companies experiencing any loss in productivity. I would argue that requiring staff to work in the office was never a trust issue but more one related to the egos, status and security of managers who need the reassurance of having staff on hand; nothing to do with employees’ ability to work.
Inevitably, the successful experiment will mean that many businesses no longer require such large commercial premises and will terminate leases as soon as possible to downsize the space needed.
Indeed I know of two large professional firms who were about to move into larger offices in the City when the lockdown hit, fortunately for them they hadn’t signed the lease and have since decided then no longer need larger premises since everyone has worked perfectly well from home.
Furthermore less space will be needed as the recovery to pre-lockdown levels is looking unlikely.
Earlier this year McKinsey produced a paper full of advice for private equity and investors in commercial property about the radical changes they would need to consider for the future.
“Many will centralize cash management to focus on efficiency and change how they make portfolio and capital expenditure decisions. Some players will feel an even greater sense of urgency than before to digitize and provide a better—and more distinctive—tenant and customer experience.”
And this was just the start!
It went on to suggest that commercial property owners, especially in B2B environments, will have to change their behaviour and “engage directly with tenants. They should follow up quickly on the actions they have discussed with tenants. Not only are such changes the right thing to do—they’re also good business: tenants and users of space will remember the effort, and the trust built throughout the crisis will go a long way toward protecting relationships and value.”
However, the report does suggest there will be some commercial property niches that could benefit from the pandemic upheaval, such as commercial storage, and in time there may be others.
There is no doubt that the nature of the commercial property market is changing, but it is perhaps premature to predict its demise.
#commercialproperty #safeinvestmnent #propertymanagement #commerciallease
 

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance General

The current state of the commercial property sector

commercial property siteWith economic uncertainty prevailing both globally and in the UK it would be no surprise if the commercial property sector was facing some difficulties.
The commercial property sector covers Community, Education, Hotel, Healthcare, Office, Retail and Industrial and it is clear from some of the statistics that the woes of retail have been acting as a drag on the sector as a whole.
Jones Lang LaSalle (JLL) provides information on property and investment opportunities and in its most recent analysis on new construction starts it revealed that they fell in the first quarter of 2019 for the first time since Q2 2017.
It reports that the ongoing uncertainty “dampened UK commercial real estate transactional activity in Q2, with investment volumes slowing to £8.9bn. This represented a 22% decline on the first half of and was the slowest first half of the year since 2013.
However, it reports, Alistair Meadows, Head of UK Capital Markets, believes that “Market fundamentals remain strong, with high levels of leasing, low vacancy rates and rental growth offering encouragement to investors. “
The Royal Institution of Chartered Surveyors (RICS) reports that in London demand for commercial property in London stayed in negative territory for the 12th quarter in a row and Capital Economics expects a weakness in investment activity is likely to extend into the rest of the year.
Aside from the obvious continuing uncertainty about the UK’s economic future outside the EU, the retail woes are likely to be a significant drag on commercial property. It is estimated that some 20% of retail landlords’ tenants are in significant financial difficulty, Many are insolvent and have embarked on restructuring via CVAs where insolvency is a prerequisite for doing a CVA. Furthermore there are indications that a lot of town centre retail space is no longer viable with landlords seeking planning permission for a change of use so property can be converted into residential units.
Finally, according to CBRE, the world’s largest commercial property services and investment company, most commercial property rents have been reducing in the first half of the year, declining by -0.2%, although it said the industrial sector was the best performing prime market, recording a capital value growth of 1.6% Quarter-on-Quarter, and a Year-on-Year of +6.8%.
One trend that may be significant in the future is the growing popularity of flexible tenancies and shorter leases rather than businesses owning and occupying large corporate buildings. This is already popular for renting for office space with Regus and WeWork growing rapidly but is likely to be used as a more flexible approach to renting light industrial and retail space.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

The current state of the UK commercial property sector

an unusual angle on commercial propertyThe UK’s commercial property sector covers everything from retail units to warehousing, office blocks to industrial units and it is no surprise that some sectors are performing better than others.
Across the commercial property sector, UK prime commercial property rental values increased 0.7% in Q2 2018, according to CBRE’s latest Prime Rent and Yield Monitor. It found that the Industrial sector was the top performer for the 7th quarter in a row with a 2.1% increase in prime rents. CBRE is the world’s largest commercial property services and investment company.
Clearly, a major concern for the commercial sector is the dramatic decline in demand for retail space in the light of the plethora of retail failures over the past two years. This has been attributed largely to the shift by consumers to online shopping, but also to the 2017 business rate revaluation that some argued had a disproportionate impact on smaller retailers although I think it has affected all non-domestic rate payers.
The most recent quarterly survey by RICS (the Royal Institute of Chartered Surveyors) also reports: “results show the downturn across the retail sector intensifying, with stores in secondary locations displaying particularly negative rental and capital value projections.”
While the demand for renting retail shopping units may have plummeted, however, demand for warehousing has soared – attributed largely to this shift to online shopping but also to the surge in popularity of the discount supermarkets such as Aldi and Lidl.
Here, CBRE reports that there has been a “near doubling in demand for warehouse space over the past 10 years” from 130 million sq ft in the previous decade to 235 million sq ft today. This is a mixture of both leased and purchased space. This is not uniform across the UK, depending as it does on efficient road and rail infrastructure and the East Midlands counties of Northamptonshire, Leicestershire and Derbyshire have benefited the most.
The BBC reported recently that “construction is under way of 11 mammoth units at the East Midlands Gateway, which is poised to host names such as Amazon, Shop Direct and Nestlé, as well as creating 7,000 new jobs”.
When it comes to office properties, again there has been some regional variation albeit that overall office prime rents increased 0.6% in Q2, up from 0.4% in Q1 2018, again according to CBRE.
However, Central London Office prime rents decreased slightly in Q2 thanks to a fall of -0.1% in the West End. By contrast South East and Eastern rents increased 1.1% and 0.9% respectively. Suburban London Offices also reported a 1.2% increase.
One interesting development is that some specialist office commercial property companies have been capitalising on the trend for flexible offices on short-term, flexible leases, in one case earning a 48% net rent premium on its flexible leases when compared with traditional lease deals.
It is perhaps surprising in the aftermath of the Brexit vote that as mentioned earlier has been the demand for industrial premises, which RICS’ survey says “continues to attract solid demand from both occupiers and investors”.
CBRE, too, reports that Industrial property continues to outperform all other commercial sectors and, as with office space, there is a regional variation in demand with the strongest rental growth in this sector in the North West, where rental values in Q2 increased by 5.9%.
Clearly, therefore, anyone interested in investing in commercial property would be well advised to pick their sector carefully and keep an eye on the shifting trends as the UK gets closer to the date for leaving the EU in March next year.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery

Times are Tough for Commercial Landlords

Commercial landlords are coming under pressure from all sides in the current economic climate.
The plight of those landlords in the retail sector has perhaps been the most widely publicised as more and more empty shops appear on the High Streets where retailers have either ceased trading or moved out of expensive and badly performing outlets.
The problem for landlords is the double pressure of receiving no rent for their empty properties while still being liable for paying expensive business rates, calculated at approximately 40% of estimated annual rental value, a considerable burden.
Recently Dixons, owner of Currys and PC World, revealed that it had agreed with some of its landlords, to pay rent of just £1 a year in exchange for Dixons continuing to pay the business rates. Dixons is not the only retailer with business rate only deals with landlords.
Problems are not only in retail, however. Many commercial landlords are struggling as their tenants downsize, restructure or go out of business altogether, leaving empty industrial and office units for whom new tenants are hard to find. They still have to service their own loans as well as securing their empty premises and paying rates.
Added to this is the change in attitude among lenders towards property companies. Property loans are generally provided by banks who are now asking for much more equity and much better tenant covenants with evidence of a secure income when considering new or renewal of commercial mortgages. Banks themselves are already overloaded with vacant and distressed property assets.
The confluence of pressure is leaving many commercial landlords completely boxed in and adding to the problem is the amount of commercial property on the market.
A related issue is the number of businesses that cannot be sold because of an existing lease obligation. Buyers often want to downsize and therefore are seeking to renegotiate lease terms before purchasing the business.
There are formal and informal restructuring options that can be used to help commercial landlords who are dealing with vacant and loss-making properties but restructuring property portfolios is a complex process and every single situation is different.  This is a situation that requires the knowledge and skill of an experienced restructuring adviser.