Longer term Covid-19 impact: our clients’ views
The DI team works across many property sectors: residential in all its forms, retail, offices, logistics, hotels, infrastructure, student housing, BTR, retirement living, education and health, quarrying, even motorway service areas. And so in speaking to our diverse range of clients on a daily basis during the lockdown period, we have seen a couple of key themes emerge from all these conversations.
Putting aside the difficulties of on-site construction activity of any type right now and the immediate challenges of running a property-centric business during an international lockdown, it seems our clients believe that two key property sectors are going to be most affected in the longer term:
Offices: our clients believe that two things will happen here, one cultural and one physical. Culturally, we Brits have always been a bit sceptical when a colleague ‘works from home’. There’s a knowing glint in our eyes: a couple of emails every few hours between Netflix, kitchen DIY or child cheerleading on the touchline was hitherto what we all assumed. But the truth is, we’re now all set up for home-working, ironed out all the IT, we’re Zoomed up and Teams friendly as Boris’ Cabinet so memorably demonstrated in the image above of the first remote UK Government Cabinet meeting. And the likelihood is we’re not all going to come back to the office in June (or whenever it is) and say: that was fun, now let me get on the 0630 hrs from suburbia every day for the rest of our lives. Culturally, we will have adjusted quite a bit and whilst we will all be coming to the office each week, we are likely to be working from home much more than before.
And this flows into the physical consequence: our clients feel that this is going to impact the office market to a measurable degree. A lot of companies are inevitably going to reduce desk numbers in the city centre as their staff’s working and commuting habits are going to change. Right now the WeWork’s and TOGs of this world are being hit hard, but in the longer term flexible, co-working, serviced offices are going to do well.
All this has ramifications for office investors quite obviously. The office market revolution is going to gather pace. And fast.
Retail: retail investors have been having a terrible time in recent years as the retail market has been going through its very fundamental structural change. Prime looks…well less prime. Secondary is now very challenged. And tertiary has frankly had the last rites. We seemed to have settled on a figure of around 11-12% of long term voids in recent times.
But lockdown has quickened the pace. Debenhams is but the first high profile casualty. Those retailers that were already marginal are likely to keel over as well. Multiples will speed up their bricks and mortar downsizing. Many independents will sadly struggle to survive. One of our very informed clients told us that long term voids could easily climb up to 25% by the end of all this. A sobering analysis. The rate of structural change is just going to speed up dramatically.
But every cloud and all that. This means that the repurposing that is happening across the sector will quicken with renewed zeal and emphasis, and in some cases, desperation. We are already working on retail to office, retail to resi, retail to leisure, even retail park to logistics projects. The variety and imagination that our clients have employed has been impressive. But the fly in the ointment has been local authorities which slavishly follow ‘the Plan’, drafted in a quite different era. They need to get with the programme fast lest they have a long line of voids on every shopping street in every town centre. A challenge for all of us to re-educate.