COVID-19 June 2020 What we know, what we expect, what we question - Knight Frank
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June 2020
COVID-19
knightfrank.com/research
What we know, what we expect, what we question.
COVID-19
Executive Summary
It is too early to speak of economic recovery. Indeed, time lags mean data released in
the coming weeks could paint an even gloomier picture, while an intense debate over
the depth, length and shape of the downturn continues to rage. And yet, there are signs
of economic life re-emerging in the UK, Europe, and certainly Asia, as the very strictest
constraints on activity continue to be lifted.
The medium-term economic path out of the crisis is becoming somewhat clearer, if not
universally more positive. In our third short summary, we highlight what we think this
means for real estate markets: what understand with relative certainty, some of our current
expectations, and some of the questions we feel are most pertinent today.
In this edition, we have chosen to add a focus on real estate debt – a vital part of the story
for the asset class during the next phase of the cycle – as well as commentary from our
market-leading healthcare and residential research teams.
As always, space constraints mean that we can only scratch the surface of these debates
here, but we would be delighted to discuss any of the issues raised with you direct, and in
more detail.
William Matthews
Head of Commercial Research
william.matthews@knightfrank.com
Keeping you informed whatever happens.
Across all areas of real estate, our Covid-19 insights hub will help you stay ahead of the curve.
Explore our latest insights, visit:
knightfrank.co.uk/research/covid-19
2COVID-19
Content
Page 4 Investment: Cautious unlocking begins. As markets begin to reopen, Victoria Ormond explains how innovation and ESG
considerations will be even more relevant for investors and addresses the implications of potential inflationary concerns.
A focus on Real Estate Debt:
Page 6 Lending markets: still open for business. Lisa Attenborough, Head of Debt Advisory, discusses the current state of the
lending market and questions whether we will see another credit crunch.
Page 7 Restructuring and recovery: Breathing space for borrowers, but for how long? Marc Nardini, Head of Restructuring and
Recovery, addresses the impact on real estate loans, lenders’ potential for leniency, and the sectors most at risk of default.
Page 8 Occupier markets: There is life in the office, yet. Lee Elliott notes the weakness in business sentiment, but sets out how the
office retains a key role in corporate organisations, and highlights the naivety behind the sensationalist “death of the office”
narrative.
Page 10 London: A quieter market. Faisal Durrani reports on the deferral of leasing activity in the London market, but highlights that
we expect to see a continued shortage of available office space.
Page 12 UK offices: a return to work, but not as we know it. Darren Mansfield explains that few occupational transactions have stalled
so far, and that construction is beginning to resume, and questions whether a greater reliance on car travel will help offices
outside London reoccupy sooner.
Page 14 Retail: picking up the pieces post lockdown. Stephen Springham notes that retailers could open from June but are likely
to take a cautious approach in doing so, and highlights that the June quarterly rental payment date could be an even greater
pinch point than in March.
Page 16 Industrial warehousing: preparing for the future. Darren Mansfield highlights the rising short-term tenant demand for space
and offers a view on COVID-19’s longer-term implications on how logistics space is used in practice.
A focus on residential real estate:
Page 17 UK healthcare: The impact on care homes. Joe Brame crunches the numbers and argues that while some care homes will be
at risk in the short-term, the longer-term demand story remains very much intact.
Page 19 Build to Rent: Going mainstream. Oliver Knight reflects on the reopening of the housing market and explores the longer-term
impact on tenant demand and tenant’s preferences for build-to-rent accommodation.
Page 20 Student Housing: Proven Resilience. Matthew Bowen discusses Government measures to support students, admissions, and
university finances, and reflects on the potential for rising demand from UK-based students.
3COVID-19
INVESTMENT:
CAUTIOUS
UN-LOCKING
BEGINS
What we know
Some real estate activity is resuming. Residential estate agencies in the UK have been allowed to re-open and across Europe, countries
continue to cautiously un-wind their lockdowns and even consider plans for travel. For example, the Baltic states of Estonia, Lithuania and
Latvia have already formed a ‘Baltic travel bubble’, opening their borders to each other, while 11 other European countries have agreed a
common approach to reopening their borders. Resuming some level of travel is important for cross-border real estate investment.
Momentum Cities
Edinburgh
Amsterdam London
10.00 Vienna Paris
Frankfurt Am Main Berlin
Dublin
Bucharest
Hamburg Oslo Munich
Lisbon
Dusseldorf Madrid
Milan Barcelona
Bristol Glasgow
Luxembourg Stockholm
Stuttgart Lyon
Oxford
Rome Helsinki
Bergen Cologne
Investment Score
Eindhoven Copenhagen
Brussels
5.00
Manchester
Newcastle Budapest
Warsaw
Geneva Prague
Zurich
Cambridge
Utrecht
-
- 5.00 10.00
Innovation Score
Source: Knight Frank
4COVID-19
What we expect of the downside, they translate into
actively stimulating economic demand.
Innovation to drive future growth. With a different shaped recovery, the
Locations underpinned by innovation considerable government and central
should continue to see the necessary bank actions target the severity of
wealth and population growth, to recessionary effects but don’t necessarily
drive demand for real estate, both in stimulate the economy enough to
the occupier and investment markets. generate demand pull inflation. However,
Identifying such locations was already cost push inflation could still be possible
important in a lower for longer growth due to continued trading frictions
environment. Knowing that innovation and social distancing measures. In an
often arises out of economic dislocation, inflationary environment real estate can
identifying these phoenixes becomes act as an inflation hedge.
ever more important. In the UK, London
as well as the university cities of How will investor types and
Cambridge, Oxford, Bristol, Edinburgh, nationalities change? Q1 2020 US
Glasgow, Manchester and Newcastle investment into the UK was the highest
all scored above average for innovation quarter on record with £6 billion
factors, according to our Momentum transacted, we question whether shifting
Cities research. currency hedging benefits and transport
frictions will change this US dominance?
The ESG agenda to persist. According Will continued low oil prices spur Gulf There is considerable
to Calastone, ESG funds enjoyed record real estate investors to search for income divergence of opinion
inflows in January 2020 to the tune of abroad? How might possible quarantine over the medium
£395 million. While March saw outflows periods and ‘travel bubbles’ shape near-
to longer-term
of £17 million, £334 million worth of term transaction activity?
inflationary potential
investment flowed back into ESG funds
of the unprecedented
in April. Mitigating the effects of climate What will be the impact on pricing?
change has been legislated for across Could we see a bifurcation in pricing
levels of fiscal and
multiple countries, including the UK. between core, income producing monetary action being
This creates an over-arching backdrop assets and others? Will transactions undertaken.
for lower carbon investment into real pause rather than pricing shift, as was
estate, with potential future regulatory seen during the Italy-European Union
and reputational risks from not doing so. budget row of 2018, when for a time,
Social investing, particularly workplace 10 year-government bond yields were
wellness should also take on a new focus above prime retail yields in Milan?
following the onset of COVID-19. When could we see distressed assets
reach the market? Will this be only once
What we question government support is unwound?
What is the longer-term inflationary
outlook and what does this mean
for real estate? There is considerable
divergence of opinion over the medium
to longer-term inflationary potential
of the unprecedented levels of fiscal
and monetary action being undertaken
as a result of COVID-19. The outcome
in part will depend on the shape of
Victoria Ormond, CFA
recovery. A strong ‘v’ shape could mean
Partner, Capital Markets Research
that rather than the government and
victoria.ormond@knightfrank.com
central bank actions being just protective
5COVID-19
REAL ESTATE DEBT:
STILL OPEN
FOR BUSINESS
What we know What we expect What we question
The number of lenders open for The time taken to close debt-backed Will this lead to a second credit
business has undoubtedly decreased, transactions will increase. Some crunch? Following the 2008 Global
but the debt market has not closed in lenders have introduced additional ‘pre- Financial Crisis, a number of measures
its entirety. Whilst it is true that many screening’ credit committees, which will were implemented by regulators to
debt providers have shifted their focus to act as a filter for transactions before they ensure that banks’ capital positions
existing clients and are therefore unable reach risk teams for final consideration. would be better protected in times of
to offer terms for new transactions, economic crisis. Since the start of the
there are still a number of active lenders An even greater emphasis on due year, the Prudential Regulation Authority
across the UK and Europe who have diligence. As well as taking longer (‘PRA’) has reduced the amount of
provided indicative financing terms since to produce (due to social distancing regulatory capital that banks need to set
the lockdown began. For transactions measures and restrictions), due diligence aside by cancelling the 2020 stress test
underpinned by robust business plans, reports will be placed under additional for eight major UK banks. This will help
debt finance is still obtainable. scrutiny. Some lenders may need to lenders focus on meeting the needs of
postpone financial close until the borrowers via the provision of credit.
material uncertainty clause included In addition, the PRA has removed the
within valuations has been removed, 1% countercyclical capital buffer that
whereas others will amend the loan-to- banks were previously required to set
value to cater for any potential ambiguity aside. These important measures should
regarding the asset value. support up to £190 billion of bank
lending to UK businesses, which is more
than 13 times the net amount previously
lent to businesses in 2019.
Resilience of major UK Banks
(CET1 capital relative to risk-weighted assets)
Reassuringly, major banks' capital positions - known as Common Equity Tier 1 ("CET1")
ratios - are almost 3 times stronger than they were before the 2008 Global Financial
Crisis relative to their risk-weighted assets.
15%
10%
5%
0%
Lisa Attenborough
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Partner, Head of Debt Advisory
Source: Property Data/Knight Frank lisa.attenborough@knightfrank.com
6COVID-19
RESTRUCTURING AND
REC OVERY: BREATHING
SPACE F OR BORROWERS,
BUT FOR HOW LONG?
What we know What we expect What we question
Individuals and corporates with Lenders will provide further breathing How long can lenders pause the loan
debt secured against all real estate room to borrowers during the period cycle and remain flexible? It would
asset classes will be impacted by of restrictions. This is to follow FCA seem that many lenders have stopped
implications of COVID-19. However, and Government guidance and wait taking on new business and are likely
every situation is unique and it would until the courts are able to enable to do so for the foreseeable future
be incorrect to assume that all secured enforcement actions. In addition, lenders until more certainty and fluidity to
debt will become impaired as a result. will be waiting until transactions start the markets has been restored. They
Nevertheless, there are significant completing in the different sub-markets also appear poised for the right time to
challenges in the present time to so they can fully understand their commence the recovery of their stressed
overcome for most borrowers to remain exposure and risk on a customer-by- and distress debt positions but wish to
compliant with their debt obligations. customer basis. do so without drawing criticism from the
media and the regulators.
For commercial property, the Where they can, lenders will try to
upcoming June rent collection will be support their customers. Those lenders Support and breathing space will
closely observed. Poor rent collection that have the ability and depth to their not go on forever. Once market and
is putting pressure on borrowers’ cash loan portfolios will provide customers economic confidence does begin
flow and ability to service their debt, with more time to resolve their debt to return, we expect lenders to take
particularly prevalent in retail, leisure issues. However, some smaller lenders aggressive steps to re-position their loan
and hotel sectors. Limited rent collection, such as challenger banks and mezzanine portfolios, re-evaluate their risk appetite
tenant default and market sentiment are and bridging lenders may not be so and to redeploy capital at a rate possibly
in turn causing LTV issues as the capital accommodating. It is therefore likely not seen for over two decades. As a result,
values begin to contract. that they will be under more pressure to will this create an artificially competitive
progress with enforcement action much market for debt and capital from Lenders,
In general, lenders are providing sooner in the cycle. Private Equity and other sources and will
breathing space for most of their it be a rush to deploy debt and capital in
customers. This partly due to the many The sectors most at risk of imminent what is anticipated to be a growing and
restrictions; FCA regulations, mortgage enforcement action by lenders thriving market?
payment holidays, risk of negative PR and are those with existing structural
media coverage, an inability to progress challenges predating COVID-19 and,
some actions via the courts and the latest then those most hit because of the
reform to UK Insolvency Law. However, virus. We expect to see many retail and
customers with existing pre-pandemic leisure assets, leased hotels, buy to let
issues are under increasing pressure from portfolios and development sites (mixed
Marc Nardini
lenders to perform. use and pure residential) to be more at
Partner,
risk of enforcement action.
Head of Restructuring and Recovery
marc.nardini@knightfrank.com
7COVID-19
O C CUPATIONAL
MARKETS:
THERE IS LIFE
IN THE OFFICE,
YET
What we know delayed or postponed investment Re-occupancy in focus as lock-down
and placed restrictions on capital measures gradually loosen. As
Markets pause as corporate sentiment expenditure. This will take time to Government’s detail routes towards the
weakens. We have tracked sentiment unlock, although we have seen an gradual reopening of their economies,
across 16 global office markets since improving level of occupier activity in business attention has turned towards
early April. It is clear that COVID-19 Hong Kong – the first of our tracked the re-occupancy of offices. This is far
has brought an acute slow-down in markets exposed to COVID-19 - over from a ‘normal’ return to office life.
active requirements from occupiers the last fortnight. This is grounds for The necessary requirement to respect
and a notable upturn in the volume of cautious optimism. social distancing measures – and a 2m
deals postponed. Weakening corporate distance between individuals – is forcing
sentiment is central to this slow-down, the reconfiguration of office layouts
with a recent global survey of CFO’s with a 50-60 per cent reduction in office
finding that two thirds had already capacity in most cases.
PREVAILING
MARKET
FIRST REPORTED ACTIVE OCCUPIERS TOTAL CONDITIONS
COMPLETED POSTPONEMENT
MARKET CASE OF OCCUPIER SEEKING ASKING RENTS OCCUPANCY (OCCUPIER,
TRANSACTIONS OF DEALS
COVID-19 REQUIREMENTS SUBTENANTS COSTS LANDLORD
FAVOURABLE OR
BALANCED)
HONG KONG 22/01/2020 ↑ → → → → → TENANT
SINGAPORE 23/01/2020 ↓ ↓ ↑ ↑ ↓ → TENANT
PARIS 24/01/2020 ↓ ↓ ↑ → → → LANDLORD
SYDNEY 25/01/2020 → → → → → → TENANT
DUBLIN 29/01/2020 → ↓ ↑ → → → BALANCED
FRANKFURT 29/01/2020 ↓ → → ↑ → → BALANCED
MANILA 30/01/2020 ↓ ↓ ↑ → → → BALANCED
DUBAI 31/01/2020 ↓ ↓ ↑ ↑ → → TENANT
LONDON 12/02/2020 → → ↑ → → → BALANCED
SHANGHAI 20/02/2020 ↓ ↓ ↓ → ↓ ↓ TENANT
NEW YORK 01/03/2020 ↓ ↓ ↑ ↑ → → TENANT
BERLIN 02/03/2020 ↑ → → → ↓ → BALANCED
SAN FRANCISCO 05/03/2020 ↓ ↓ ↑ ↑ → → BALANCED
BANGALORE 09/03/2020 → → ↑ → → → BALANCED
MUMBAI 11/03/2020 → → ↑ → → → BALANCED
NAIROBI 12/03/2020 ↓ ↓ ↑ ↑ → ↓ TENANT
Source: Knight Frank, May 2020
8COVID-19
What we expect we have previously highlighted.
The great global workplace to The ‘death of the office’. The 20-year
continue. As re-occupancy becomes a old death of the office narrative has
reality for more businesses, we will move reappeared with gusto over the last
rapidly into the second phase of the two months. Enforced working from
great global workplace experiment. The home, and now the emergence of hybrid
capacity constraints within existing office working styles that blend WFH with
portfolios will force companies to adopt working in the office, have led to bold
hybrid workstyles with a clear distinction claims about how businesses could
between staff working at home or in the benefit from removing their second
office. This will be a difficult balance for largest operating cost. This is naïve.
business leaders to strike from both an The office is central to the creation and
operational and managerial perspective. maintenance of a corporate culture.
It is essential to the innovation and
Evolution not revolution. There creativity required to stay competitive.
have been many revolutionary claims It is the place where essential (and often
about the effects of COVID-19 on office tacit) staff development and education
occupancy. We do not buy such claims. occurs and where social connections
Instead, we see an expedited evolution transform into important professional
of the office following many of the collaborations. Businesses are
cues evident in the market prior to the immeasurably weaker without recourse
The office is central
pandemic. A key reason for this is the to an identifiable collective hub. That is
limited ability for occupiers to enact not to say that the form and function of
to the creation and
rapid change at an asset or portfolio level. the office is beyond reconfiguration but, maintenance of a
Economic and operating conditions will once again, rumours of the death of the corporate culture.
serve to apply a brake in the short-term, office have been greatly exaggerated. It is essential to
whilst lease breaks and expiries will the innovation and
typically be required to enact change and creativity required to
these are seldom instantly available.
stay competitive.
What we question
A fundamental shift in the pre-crisis
supply vs demand dynamics. There
has been growing talk of the impacts
of COVID-19 on market fundamentals.
While a close-eye needs to be kept
on sub-letting activity within global
markets (with an uptick in four of our 16
tracked markets in the last fortnight) we
believe that the limited supply of quality
office space in global markets will be
sustained, not least because of short-term
financial and practical constraints on the
delivery of new space. We also believe
that demand will be strong post-crisis.
Dr. Lee Elliott
While recognising a potentially difficult
Partner, Global Head of
economic environment, the urgency of
Occupier Research
business restructuring (particularly in
lee.elliott@knightfrank.com
respect of digital transformation) will
further the disruption = demand dynamic
9COVID-19
LONDON:
A
QUIETER MARKET
What we know the space that they were previously – to Prime headline rents for best-in-class
accommodate home working. space are still holding steady, with almost
Leasing decisions being deferred. Since 17 March, there have been 106 lease no instances of attempts to chip rents for
10-weeks into the COVID-19 crisis and transactions, totalling just over 700,000 grade A space. Lease incentives, however,
the market is starting to become quieter. sq ft, with 3.55m sq ft under offer. It is have drifted: 21-24 months on some 10-
Pre-letting activity that was in train unlikely that all the space under offer will year leases, instead of 18-21 months in
prior to the lockdown is for the most part transact before the end of the quarter, the West End and nearer 24 months in
still completing and new requirements suggesting Q2 will see leasing volumes on the City, which were previously at 21-24
have been slowing for a number of par with Q1, if not lower. months.
weeks as businesses have been spooked
by the very real threat of a prolonged Rent holiday requests ebb. For now,
period of economic contagion. We do rent holiday requests, or rent deferment
however appear to be approaching an appeals via the government’s Corona We do appear to
inflection point, with a small pick-up Virus Bill appear to be subsiding. This be approaching an
in new demand. Although it is too could be reflective of the fact that we inflection point, with
early to quantify the exact figure, these are now halfway through Q2, with a a small pick-up in new
new requirements are different. The resurgence likely as we approach the end demand.
businesses looking for new offices are of June.
typically seeking approximately 75% of
10COVID-19
What we expect covenants and perhaps to a lesser extent, addition to a more permanent adoption
global travel restrictions. of a working-from-home (WFH) dynamic
The shortage of grade A office space as working practices are reviewed in
will persist. As occupational demand What we question light of the effectiveness of technology in
begins to recede amongst certain sustaining productivity across a largely
occupier groups who are taking a A rapid return to “normal”. With remote workforce.
“wait and see” approach, the extended the government easing lockdown
completion time-frames mean that the restrictions, optimism is running high Notwithstanding mobility challenges
supply-demand dynamic which has for a rapid return to “normal”. However stemming from the government’s
shaped London’s office market since the questions remain about the ability estimate to run our rail networks at 10%
Global Financial Crisis (GFC) is being of offices to re-accommodate their capacity to maintain social distancing,
prolonged, shielding the market from a workforces safely, in our new world of the design and layout of offices will need
potential glut of new stock. In fact, even social distancing, which, among other to be revisited as businesses reassess
if take-up levels for new and refurbished things, requires 135 sq ft per desk based how best to house their staff in safe
space were to fall to levels not seen since worker, according to our estimates. If and secure environments. Indeed with
the GFC this year, London would still be this is extrapolated, in theory, the West natural materials, such as wood, brass
looking at a development shortfall of new End emerges as the most generous and copper, emerging as unfavourable
and refurbished space of almost 1m sq ft market, with an almost consistent 160 sq for the surface transmission of COVID-19,
in 2020. ft apportioned to staff over the last five the combined wellness and green
years. The City, at 126 sq ft per employee, agenda that was accelerating before the
Private wealth to become a key player outperforms the Docklands, where the COVID-19 crisis will likely experience
in the market. Not hamstrung by the figure stands at 104 sq ft per person, a further surge in interest as the
politics of shareholder approvals, we 23% below the minimum threshold to focus shifts to the “S” and “G” in ESG
expect to see greater activity from maintain social distancing. considerations.
private investors. Indeed, our own
sentiment indicators have shown a rise In theory, if we factor for office stock In parallel, as businesses work hard to
in international buyer inquiries over due for delivery this year, which is not tempt the workforce back into offices,
the past fortnight, especially those already spoken for, this would equate workplace wellbeing, and world-class
from Greater China. That said, despite to an immediate requirement of 6.1m experiences will become sharper areas
sterling’s weakness as the dreaded sq ft and 4.4m sq ft, respectively. of focus. This is especially pertinent in
B-word (Brexit) returns to haunt UK plc Rather than committing to new space London where 64% of our office stock
ahead of a potential no-deal scenario to accommodate their workforces, it is was completed prior to the year 2000.
by year-end, rapid deployment will be likely that businesses will instead turn This creates a tremendous opportunity
hampered by a number of other critical to the flexible office market as a stop-gap to upgrade existing facilities to meet the
factors: lack of debt options, a dearth of solution due to the short term nature of needs of our new post-COVID-19 era.
stock, greater scrutiny of any underlying commitments. This will likely come in
Availability of new & refurbished space
Sq ft.
West End City Docklands London total
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
Q1 2009
Q3 2009
Q1 2010
Q3 2010
Q1 2011
Q3 2011
Q1 2012
Q3 2012
Q1 2013
Q3 2013
Q1 2014
Q3 2014
Q1 2015
Q3 2015
Q1 2016
Q3 2016
Q1 2017
Q3 2017
Q1 2018
Q3 2018
Q1 2019
Q3 2019
Faisal Durrani
Head of London Commercial Research
Source: Property Data/Knight Frank faisal.durrani@knightfrank.com
11COVID-19
UK OFFICES:
A RETURN TO
WORK, BUT NOT
AS WE KNOW IT
What we know Construction sites are restarting.
Although the UK government stopped
Space remaining under offer, but new short of forcing building sites to close,
enquiries have decreased. Despite many developers elected to stop
unprecedented market disruption, the operations to ensure employee safety.
The tight supply
amount of space under offer outside With restrictions now loosening, sites are
landscape and a
of London has not dipped markedly. reopening, albeit materials availability general flight to
In the South East for example, close and workforce reduction could affect quality will mean that
to 590,000 sq ft remains in lawyers’ completion dates. At the time of writing, headline rents hold
hands. This compares to 567,000 at the 8m sq ft is due to complete across the UK firm despite the fall in
same point in 2019. Encouragingly, this cities and South East over the next three transactional activity.
demonstrates that there are few examples years, of which 50% is already let.
of withdrawn deals during the pandemic.
New enquiries however, have fallen as
occupiers take stock of the situation.
12COVID-19
What we expect What We question What will be the consequences for
the green agenda? Prior to COVID-19,
Return to the office will not mean back Assignment or subletting to rise? ESG integration was rising as the topic
to normal. Although all focus for businesses of urgent action. The environmental
Even after restrictions are relaxed, the currently will be the safe return to component was of particular focus, with
return to physical spaces will be slow and work, firms will also be contemplating real estate considered as holding a key
gradual. Employees are likely to return to the workplace beyond Covid19. The role in achieving sustainability targets.
the office in stages and as safety allows. aftermath of previous economic shocks The ‘Green Agenda’ has not disappeared
Interaction with spaces will be different, has registered an increase in tenant and is growing in criticality, but fears
meaning a greater onus on landlord and release space. Will the coming months are that heightened monetary scrutiny
tenant collaboration. Any strategy for see a rise in ‘grey space’ entering the in a post pandemic world will derail
reoccupation will include an assessment market or will concern over future some environmental management
of the quantum of space required. Either supply support the retention of current responsibilities as it has done in the past.
occupancy will need to be below capacity occupational footprints? Moreover, the pandemic may encourage
to allow for distancing or businesses change with regard to commuting
may seek additional short-term space Will commuter method aid business choices. Will local authorities rethink
to accommodate this health and safety recovery? Following the easing of plans to reduce car usage in major
requirement. COVID-19 restrictions, businesses cities? How suitable are the proposed
across the UK have been hurriedly walking and cycle lane plans to the
The need for agility will hasten assessing how to achieve a safe return to daily commute? Will any increase in
digital transformation. As the office buildings. Whilst practical steps private vehicle use accelerate the shift to
forced shift to remote working reveals within the workplace in terms of social electric?
fissures in business continuity, digital distancing, sanitisation and staggering
transformation will clearly be a high work patterns are achievable, the journey
business priority moving forward. The method to work remains beyond the
crisis has evidenced both improved control of individual firms. Outside of
business agility via technological means, London, around 60% of journeys to
and reminded of the important role that work are by car. With less reliance on
technology holds in current and future public transport as a means of travel for
service delivery. Digital infrastructure, employees, will this preference enable
whether at a city or building level, will an easier route to back to the office? Will
therefore be a point of differentiation for locations with easy car access such as
offices and cities moving forward. business parks see a demand increase?
What alternative steps will balance
Headline rents to hold firm. The tight sustained or additional car use with
supply landscape and a general flight emission reduction targets?
to quality will mean that headline rents
hold firm despite the fall in transactional
activity. The greatest impact of the crisis
will be through a softening in rent-free
incentives and lease flexibility.
Darren Mansfield
Partner, UK Research
darren.mansfield@knightfrank.com
13COVID-19
RETAIL : PICKING
UP THE PIECES
POST LOCKDOWN
What we know Footfall and retail sales remain in
freefall and many retailers are still
When the high street lockdown will operating on a zero or minimal
be lifted. “Non-essential” stores come cashflow basis. Footfall was down
under Step 2 of the UK government’s -84.7% year-on-year in April. Retail
“roadmap out of the lockdown” plan, sales slumped by -19.1%, unsurprisingly
which becomes operational from 1 June. the worst monthly performance since
Leisure (including F&B) falls under Step records began in 1995. Although online
3 of the plan, which comes into force a sales spiked by +57.9% to reach a record
month later (i.e. from 1 July). These dates high of 69.9% of all non-food sales, the
are provisional and highly conditional on key message from most operators is
a number of targets being met (although that online is only picking up a limited
there isn’t much transparency as to what proportion of lost store-based sales.
these targets actually are).
Year-on-Year Retail Sales Growth 2008 - 2020
10.0
5.3
4.5 4.2
5.0 4.0 3.5
3.1 3.4 3.2 3.1 3.4 3.2
2.6 2.9
1.8 1.8 2.3
1.7
1.1
0.0
-5.0 -3.9
-10.0
-15.0
-18.0
-20.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019 2019 2019 2019 2020 2020 2020 2020
Q1 Q2 Q3 Q4 Jan Feb Mar Apr
Source: ONS, Knight Frank
14COVID-19
What we expect What we question
Retailers are likely to take a softly- The prospect of a rapid “bounce back”
softly approach to re-opening, rather in consumer demand. The “pull” factors
than try to re-commence trading with (pent-up consumer demand) will be far
all guns blazing. There is a sense of relief outweighed by three key formidable
that that enforced closures may soon “push” factors, certainly in the short- to
be coming to end and cashflows can re- medium-term.
commence, but this is overshadowed by
concerns of how to adapt stores to make 1. Consumer reluctance to return
them compliant to social-distancing to public spaces (especially retail
and complete uncertainty over potential stores)
trading volumes in both the short and
medium term. 2. Stores that are open adhering to
social-distancing compromises
It is highly unlikely that every shop
across the land will re-open on 1 June. 3. Genuine economic concerns
Retailers are currently reviewing their (especially around job security)
portfolios to explore which ones lend
themselves best to social-distancing The timeframe on any recovery.
measures and to understand the costs Most retailers are already looking to
involved (additional door/security Christmas as the first point of meaningful
staff, inflexible movement of instore temperature check. But recognising
personnel, perspex screening, floor there are considerable pinchpoints
Realistically,
taping, additional POS). It follows that before then (e.g. quarterly rent days in few retailers are
stores with larger floorplates are likely June and September and the prospect anticipating a return to
to be given priority. In terms of a broad of changes to the government furlough “normalised” trading
pecking order, this would suggest the scheme etc). Realistically, few retailers levels until this time
following re-opening sequence – retail are anticipating a return to “normalised” next year…
warehouses, high street and then trading levels until this time next year, at
shopping centres (with Leisure last of all). the earliest. Even then, Christmas 2021
may be a more realistic barometer.
June’s quarterly rent day will be an
even greater pinchpoint than March’s.
Most retailers are in a far worse cash
position now than they were a few
months ago. We project that only between
10% and 20% of retailers will meet their
Q2 rent obligations in full and on time –
most will seek landlord concessions.
Stephen Springham
Partner, Head of Retail Research
stephen.springham@knightfrank.com
15COVID-19
INDUSTRIAL WAREHOUSING:
PREPARING
FOR THE FUTURE
What we know a single management team) could be the ahead of most countries, might offer
result. some positivity however. A sharp rise in
Short term space requirements rising. individual car use has been recorded as
Knight Frank has registered over 6m Vacancy to rise, but no oversupply. commuters avoid public transport. Could
sq ft of short term requirements since Whilst tenant distress will inevitably a shift in consumer attitudes to cars
lockdown, although only a small turn to failure for some organisations, protect car makers from the worst of the
proportion have led to deals on vacant a market overweight with warehouse economic fallout?
space. The majority have been absorbed supply is not predicted. It is too early to
into existing 3PL networks, but there say how much space may be returned Will COVID-19 accelerate automation
is now very little “grey space” left because of downsizing or default, in warehousing? Risk mitigation is
unaccounted for. This has meant that but any increase will be mitigated by clearly going to be a lasting legacy of
3PLs have re-entered the market with development delay. Contractors have the COVID-19 crisis for businesses.
new requirements. now mostly been able to return to sites, This may mean that processes that are
although social distancing measures and labour intensive are assessed as an area
Aviation adversely affected. Jobs supply chain disruption will hamper of potential vulnerability. As such, an
losses at Rolls Royce is further evidence progress for some time to come. acceleration toward greater reliance on
of the damage COVID-19 is having on robotics and automation may be the
both aviation carriers and suppliers. It What we question consequence, a shift which will have
is reported the many of the expected a marked impact on the design and
cuts will be at the assembly and test site A shift to online to add further specification of warehousing. Will the
in Derby. To contextualise, Heathrow pressure to the supply chain? Whilst rate of building obsolescence increase
recorded cargo volumes of just over supply chains across industries will as a result? Would any increase in fit out
50,000 tonnes in April 2020, the lowest clearly be an area of scrutiny post expenditure mean that tenants become
monthly total since 2005. Passenger pandemic, the acceleration of online more ‘sticky’?
numbers were the lowest since 1997. retailing could add further pressure.
As retailers reopen and adjust to a new
What we expect marketplace, competition will intensify
to achieve speed to customer. Will this
Social distancing – Here to Stay. The encourage a shortening of supply chains
first signs of social distancing on large as production is brought closer to home
scale fulfilment operations and wider markets?
occupier planning beyond the pandemic
are beginning be factored. Businesses A glimmer of optimism for UK Car
are of the view that measures are likely Manufacturers? As the UK begins
to remain in force for the medium term to relax COVID-19 restrictions, car
– years not months – or until a vaccine is manufacturers are tentatively restarting
developed. As a result, additional space operations. Even so, with the economic
is being sought for immediate use, but outlook looking increasingly poor,
Darren Mansfield
longer term warehouse design and a predictions regarding car sales are
Partner, UK Research
possible move to campus type operations understandably gloomy. Indications
darren.mansfield@knightfrank.com
(adjacent units, capable of being run by from China, which came out of lockdown
16COVID-19
U K H E A LT H CA R E :
THE IMPACT ON THE
CARE HOME SECTOR
What we know Occupancy rates will fall. Initial
estimates suggest a mortality rate of 15%
Workforce is vital. While we should for those aged 80 and over, with even
applaud the NHS professionals working greater risks reported for those with
to save lives in hospitals, we cannot forget acute medical needs – such as care home
the role played by 1.6 million people residents. The rate of mortality will of
working in the adult social care sector. course vary from care home to care home,
This includes 685,000 people working but the death toll will have an aggregate
in care homes, most of which are highly effect on the UK market. Occupancy
skilled but low-paid nurses and carers. has begun to fall slightly as a result of
The lack of PPE and testing kits available deaths, but also because of the decline
to the sector has been in the spotlight, in new admissions. This may change as
and rightly so. We are now seeing greater testing becomes more widespread and
availability of such equipment, helping admissions return to normal levels.
operators to reassure staff and admit new
residents without fear of putting existing
residents at risk.
The NHS and adult social care workforce
Source: NHS Digital, Skills for Care
17COVID-19
What we expect What we question
Smaller homes are potentially more at How prepared was our healthcare
risk. Care operators are well-equipped to system? The NHS and the government
deal with seasonal flu, as well as diseases did respond quickly to this pandemic, but
such as dementia and Alzheimer’s, but compared to other advanced countries
COVID-19 is an unprecedented challenge. in Europe, the UK healthcare system
While not a blanket rule, outbreaks are looks undersupplied. The total number
likely to have a more pronounced effect of hospital beds managed by NHS
on smaller independent care homes, England has fallen 23% in the last 20
typically with less than 40 beds. Our years (Source: NHS Digital), while the
analysis shows that around half of UK population of the country has increased
care homes are below this size and those by 15%. Furthermore, critical care bed
without large group backing or the provision in the UK equates to around 6.5
economy of scale to absorb occupancy beds per 100,000 people compared to 29
loss, are at greater risk. beds per 100,000 in Germany.
Long-term drivers remain robust. Is there still a development
It is going to be a difficult year, but opportunity? Most definitely – While … the building of
there are some key factors supporting there may be some delays to the new care homes and
long-term growth in the sector. This is construction pipeline, the building of other healthcare
not to underestimate the challenges, new care homes and other healthcare facilities will remain
but to remind stakeholders that the facilities will remain vital in servicing
vital in servicing the
fundamentals for this property are still the demands of our ageing population.
demands of our ageing
strong. A significant decline in bed COVID-19 is likely to have further
population.
demand will not be enough to derail the implications in terms of design as
growth in the number of over 85s in the new builds reshape to deal with future
approaching decades. Furthermore, its pandemics. Furthermore, the prospect
important keep in mind the UK’s strong of an economic downturn will enhance
global reputation, both as a healthcare the flight to quality among healthcare
market and a destination for global investors and new developments will
capital. provide a means accessing the prime end
of the market.
Uk over 85 population growth projection
Over 85 population (LHS) Share of total population (RHS)
3,000,000 4.5%
40%
2,500,000
3.5%
2,000,000 3.0%
2.5%
1,000,000
2.0%
1,000,000 1.5%
1.0%
500,000
0.5%
0 0.0% Joe Brame
2040
2020
2030
2028
2034
2038
2026
2029
2036
2025
2035
2039
2024
2022
2023
2032
2033
2027
2037
2021
2031
Healthcare research
Source: ONS joe.brame@knightfrank.com
18COVID-19
BUILD TO RENT:
GOING MAINSTREAM
What we know What we expect equating to over half a million ‘lost’ sales.
Logic dictates that some of this demand
Lockdown restrictions have been Interest from institutional investors will be absorbed by the rental sector, but
eased. The government has amended and new entrants to the market could it comes at a time when the shift from
the coronavirus regulations to make rise. Prior to the outbreak of COVID-19, owner occupying to renting has slowed. A
clear that people who wish to move home institutional investment in residential lot will depend on the speed of recovery
can now do so. The lifting of the full UK assets, and of diverting capital away from within the sales market, but with fewer
lockdown will run in stages through other commercial real estate sectors, households looking to buy during times
to at least July, but the announcement was an increasing trend. The current of heightened economic uncertainty
untangles one of the main sticking crisis has only served to reinforce the (as experienced in the wake of previous
points for the rental market with an outlook from investors on the defensive recessionary periods), and long-term
inability to conduct viewings slowing the characteristics of the sector, as well as forecasts pointing to continued growth
lease-up of newly constructed buildings the granular nature of income. We expect in new household formation, we believe
as well as of vacant units. Initial signs that a search for core income-producing momentum will pick-up once again.
are that demand has bounced back assets in safe-haven locations (such as
strongly, with weekly new prospective the UK) from investors may well act Whether tenant preferences will be
tenant registrations 9% above the five as a catalyst supporting this shift of changed. Shared amenity space, such
year average. Logistical challenges are investment. Our investment team has as gyms, lounges, and external terraces
ongoing, but the liquid nature of the already experienced a rise in enquiries, and gardens have universally been
rental market, combined with a release of particularly for stabilised assets and from closed and any re-opening is likely to be
pent-up demand for good quality rental new non-domestic investors. gradual and require some form of social-
product should drive a pick-up in new distancing measures. Operators will be
tenancies. Rental performance will be keen to understand the practicalities of
increasingly asset specific. Near- such an approach, as well as the costs
Rent collection has been robust. term expectations among owners and involved. Tenant demand may well be
Rental accommodation has proven investors are generally for no rental for adaptable multi-use, rather than
resilient in previous downturns and growth, or a slight fall in rental values in single-use, spaces. Demand for provision
evidence so far suggests that the sector 2020. Our view is that BTR rents will be of some form of private outside space
has weathered the initial impacts unchanged this year before recovering is likely to increase and command a
of COVID-19 remarkably well. Rent in 2021 and picking up thereafter. Within premium.
collection averaged more than 96% in this, however, asset specifics will be
March and nearly 94% in April, according significant, with performance likely to
to the results of our survey of some of differ between assets dependant on - but
the biggest investors in professionally not limited to - their exposure to student,
managed PRS in the UK. Figures for the international and corporate tenants,
remainder of the year will be tied to the as well as local supply volumes and
wider economic picture (particularly affordability dynamics.
surrounding unemployment), but initial
signs are encouraging. What we question
What will the long-term impact be on
Oliver Knight
tenant demand? The number of sales
Residential Research
transactions is projected to fall nearly
oliver.knight@knightfrank.com
40% in 2020 compared with last year,
19COVID-19
STUDENT PROPERT Y:
PROVEN
RESILIENCE
What we know cash flow for universities. Controls on PBSA bookings for the coming cycle
student recruitment are also proposed are on track. The current evidence
Government has moved to stabilise as a temporary measure and will mean of bookings from operators in May
university admissions. The government providers only being able to recruit is broadly in-line with performance
announced a package of measures to full-time, domestic and EU students at the same time last year. Operators
boost support for students, stabilise the up to 5% above their forecasts in the have targeted UK-domiciled students
admissions system and ease pressures next academic year. This is designed in greater numbers this year with an
on universities’ finances early in May. to reduce volatility and ensure fair and expectation that there may be lower
More than £100 million of existing orderly admissions. The government will international student enrolments. As
research funding for providers in also have the discretion to allocate an more universities provide clarity on how
England is being brought forward into additional 10,000 places, with 5,000 ring- they will operate in the forthcoming
this current academic year as is tuition fenced for nursing, midwifery or allied academic year, both international and UK
fee payments of students in the 2020/21 health courses to support the country’s students will firm up their decisions on
academic year, expected to be worth vital public services. where to study.
£2.6 billion. Both measures will support
20COVID-19
What we expect What we question
Universities will take a ‘blended Whether student accommodation
learning’ approach to teaching. UK preferences will be changed. We
universities are planning to deliver have seen a trend over the last few
‘blended teaching’ from the beginning years of greater levels of satisfaction
of the next academic cycle as a way of with PBSA against mainstream rented
maintaining the ‘student experience’ accommodation. This has led to higher
and in a bid to prevent students from levels of retention, within PBSA, of
deferring a year. Most institutions are students moving between years. In
hoping to offer a mix of both face-to-face our 2020 Student Accommodation
and online teaching and will implement Survey, undertaken with partners
social distancing measures across UCAS, a quarter of first year students
campus and in student accommodation. who were living in private PBSA said
The universities of Manchester, Bolton that they planned to stay in the same
and Edinburgh and Nottingham Trent accommodation the following year, rising
have already announced that they to 40% among second years. It is likely
intend to deliver a hybrid approach from that the impacts of COVID-19 will see this
September. trend accelerate with further interest by
students of all domiciles in PBSA.
Demand from UK-domiciled students
to increase. Applications data from The long-term status of UK higher
UCAS for new students showed that a education will be damaged. In its
total of 568,330 applicants (as of the recently announced package of measures
15 January deadline) applied to UK the UK government reiterated its
universities this year, up 1.2% on 2019. commitment to increasing international
Overall, a record 39.5% of all UK 18-year student numbers. The International
olds applied to university, with more Education Strategy, released by the
than 50% of 18-year olds from London government in 2019, aims to increase
applying. The number of 18-year olds in international student numbers in the UK
the UK is projected to increase from 2021 by more than 30% to 600,000 by 2030.
onwards, following years of declines, The government is considering how the
and this is expected to drive a growth in International Education Strategy can be
student numbers. Knight Frank analysis updated to respond to the impact of the
of ONS population projections, along coronavirus outbreak and will also be
with entry rates from UCAS, points to a launching the new graduate visa route
15% increase in full-time undergraduate by summer 2021. A stronger offer is likely
numbers between now and 2030. This to boost the UK’s appeal and support
would represent an additional 220,000 institutions to attract overseas students.
domestic students. The UK boasts 11 of the world’s top 100
universities, and these will continue to
act as a draw.
Matthew Bowen
Global Head of Student Research
matthew.bowen@knightfrank.com
21Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range
Knight Frank Research of clients worldwide including developers, investors, funding organisations, corporate institutions and
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