INVESTMENT BRIEF The definitive guide to UK commercial property investment Summer 2020 - Gerald Eve
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INVESTMENT BRIEF The definitive guide to UK commercial property investment Summer 2020 geraldeve.com
UK COMMERCIAL PROPERTY OVERVIEW AND OUTLOOK
The economic impacts of the coronavirus-induced social The commercial property sector remains comparatively
lockdown from mid-March initially came through on the higher attractive to income investors verses the stock market, where
frequency business sentiment and unemployment figures. dividends have been suspended or reduced. Nevertheless,
These now also feature in part in the Q1 GDP growth and property yields moved out sharply at the end of Q1, notably for
commercial property returns data. Economic output fell 2% Retail and Leisure, where business operations have been hardest
quarter-on-quarter, which suggests that GDP growth will be and most directly hit. For 2020 as a whole we expect rents to
around -14% for Q2 and -8.3% for 2020 as a whole. fall 4.2% and yields to soften by 60 basis points – driven very
much by the beleaguered retail sector. This will cause a 14% fall
Many Q1 commercial property investment transactions had in capital values and generate a total return of -10.4% before
already occurred or were at an advanced stage so the ostensive stabilising in 2021 without a significant bounceback.
drop appears relatively modest. The first quarter also featured
some exceptionally large deals – Blackstone bought the £4.7bn
iQ student accommodation portfolio and the £500m Hansteen
industrial portfolio, and a Qatari investor paid £700m for the Ritz
on Piccadilly. Stripping out these exceptional transactions, the
investment total was down 45% quarter-on-quarter, which is
ominous for the Q2 total deal volume.
All Property investment volumes All Property total return and components
Sources: Property Data, Gerald Eve Sources: MSCI, Gerald Eve
£ billion % per year
20 30
45% quarterly drop
18 excluding exceptionals
20
16
14
10
12
10 0
8
-10
6
4
-20
2
0 -30
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q1 2020
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Income return Yield impact
Alternatives Office Leisure Rental growth Total return
Industrial Retail
2 INVESTMENT BRIEFIndexed capital values by major property sector
Sources: MSCI, Gerald Eve
Index, Q1 2005 = 100
The industrial segment has fared better than other property 160
Financial Brexit Coronavirus
segments, notably larger logistics and data centres associated crisis referendum pandemic
with the increase in online shopping and working. Smaller multi- 140
let units with a greater proportion of direct-trading SME tenants
have been more vulnerable. There is a broad cross section of 120
investment buyers with activity focussed on secondary where
100
pricing has slipped 5%-10%. Defaults and voids are forecast to
rise from late 2020 but not reach 2009 levels since the modern
80
occupier base is strong and diversified while new supply is tight.
A relatively modest 40bps outward yield shift is expected by
60
the year-end. Online retail breaks
10% of total sales
40
Mar 2005
Nov 2005
Jul 2006
Mar 2007
Nov 2007
Jul 2008
Mar 2009
Nov 2009
Jul 2010
Mar 2011
Nov 2011
Jul 2012
Mar 2013
Nov 2013
Jul 2014
Mar 2015
Nov 2015
Jul 2016
Mar 2017
Nov 2017
Jul 2018
Mar 2019
Nov 2019
Jul 2020
Mar 2021
Nov 2021
Jul 2022
Retail Industrial
Office
Office investment is weak while social distancing limits
viewings to a greater extent than its industrial counterparts.
The June quarter rent collection is likely to be worse than March,
potentially triggering sales in poor performing assets. The
impact of the coronavirus on capital values has been felt more Average annual total return, 2020-22
in UK regional markets, with core London assets showing more Sources: MSCI, Gerald Eve
resilience. Overseas investors were the most active overall in Q1,
%, per year
but ongoing travel restrictions suggest that UK-based investors
6
may be able to benefit from less competition later in 2020.
4
2
0
-2
Retail property has been hit particularly hard due to the
direct lockdown measures on trading units coupled with -4
the accelerated trend to online. Many retailers are suffering
-6
significant cashflow difficulties and rent collection has been
and is expected to be poor. Government intervention is -8
unlikely to be sufficient to stem the tide of administrations.
Shopping centres
High street
Retail warehouse
Hotel
Leisure
Residential
Midtown office
West End office
Inner SE multi-let
ROUK office
City office
ROUK multi-let
All multi-let
London multi-let
Healthcare
Outer SE multi-let
SE office
Outer London office
Distribution warehouse
All retail
All office
All industrial
All property
Shopping centres saw a 10.5% fall in capital values in Q1 alone,
with the largest shopping centres most affected. This follows
the recovery that never really materialised after the global
financial crisis. The chart shows retail capital values that stalled
relative to the other property sectors and that are forecast to
be only 43% of their 2007 pre-crisis peak by the end of 2021.
This fundamental shift and very negative sector outlook points
to more ‘repurposing’ of retail property to alternative uses in
future, especially in London.
UK COMMERCIAL PROPERTY OVERVIEW AND OUTLOOK 3UK ECONOMY
The much-anticipated Q1 2020 preliminary GDP estimate suggested economic activity fell 2% in
Q2, the worst quarter since Q4 2008. This was almost entirely due to a 5.8% monthly decline in
GDP in March, caused by measures implemented to try to limit the spread of the coronavirus.
Oxford Economics estimates that GDP was running at roughly 85% of its normal level during the
lockdown period at the end of March, but with huge sectoral variation.
The hospitality sector has been particularly badly hit, with output at just 20% of its normal level.
But at the other extreme, output in the agriculture and public administration sectors has been
largely unaffected.
The key transmission channels are temporary closure of firms, either through direct government
D
CL OSE instruction or because restrictions on movement have reduced demand and it is not financially
viable to remain open; lower discretionary spending given that opportunities in crowded places
have been removed and a rise in precautionary saving; lower working hours due to school
closures, self-isolators unable to work from home and a higher incidence of sickness.
Assuming that the lockdown is relaxed according to the timeline set out by the government,
activity is likely to have reached a trough in April. There should be a very gradual recovery in
May and June as lockdown restrictions are steadily lifted, but GDP will nevertheless likely fall by
around 14% in Q2. The GDP growth forecast for 2020 as a whole is -8.3%.
The key drivers of the 2021 economic rebound will be very low inflation from the collapse in
the oil price; loose monetary policy with the Bank Rate cut by 65bps to 0.1% and £200bn of
quantitative easing; and loose fiscal policy in the form of unprecedented loans, wage guarantees
and tax breaks.
GDP is not forecast to return to its Q4 2019 level until the end of 2021. There are significant risks
surrounding this outlook, given the myriad possible paths and timelines from this point.
4 INVESTMENT BRIEFUK GDP forecasts Key macroeconomic variables: history and forecast
Source: Oxford Economics Source: Oxford Economics
Level, 2019=100
2015 2016 2017 2018 2019 2020 2021 2022
110
Forecast
GDP growth 2.4% 1.9% 1.9% 1.3% 1.4% -8.3% 7.8% 3.4%
105
Consumer spending
growth
2.9% 3.8% 2.3% 1.6% 1.1% -10.5% 8.4% 4.5%
100
Manufacturing
output growth
-0.1% 0.2% 2.2% 0.9% -1.5% -5.3% 3.3% 1.5%
95
Services
employment growth
1.8% 1.7% 0.6% 0.7% 2.1% -2.9% 2.2% 2.5%
90
10-year bond yield 2.0% 1.3% 1.3% 1.3% 0.9% 0.5% 0.9% 1.2%
85
RPI inflation 1.0% 1.7% 3.6% 3.3% 2.6% 1.2% 1.8% 3.0%
80
2018
2019
2020
2021
2022
May 2020 forecast Q4 2019 level of GDP
UK ECONOMY 5INDUSTRIAL
• Industrial segment faring better than other property Industrial properties have generally fared better than the
segments, notably larger logistics and data centres other major property sectors so far. Occupier operations in
sheds are often less densely populated and lend themselves
• A broad cross section of buyers with activity more straightforwardly to social distancing. Large logistics
focussed on secondary where pricing has slipped and data centre units have been particularly robust in the
5%-10% current set of circumstances.
• Expect defaults and voids to increase from late 2020 Smaller multi-let assets with a greater proportion of SME tenants
but not reach 2009 levels have been affected more negatively. Leisure operators and many
trade counters dealing directly with the public were initially
• A relatively modest 40bps outward yield shift forced to close and many remain so. Off-site construction firms
forecast by the year-end and manufacturing – particularly those allied to the automotive
industry – have experienced severe business interruptions.
• Total return of -3.5% for 2020 before a resumption of Meanwhile suppliers to restaurant, hotel, coffee shop and other
positive but relatively moderate returns from 2021 hospitality fields have suffered a near complete drop in traditional
demand and need to innovate to generate income.
The official quarterly investment transactions data for Q1 only
effectively captures the coronavirus-induced lockdown for the Quarterly rent collection in March returned around 65%-70% of
last two weeks of March. Many Q1 deals had already taken place MLI rent, but as much as 90%-95% of distribution warehouse rent.
at that point or were at an advanced stage.
In the investment market there is now a broad cross section
All segments nevertheless show a sharp decline, except for of buyers and activity is focussed more at the secondary and
Portfolios, which was boosted by Blackstone’s £500m purchase value-add end of the spectrum where pricing has slipped
of the Hansteen portfolio in February. around 5-10%. The institutions are typically the most cautious
buyers and, at the prime end, a buyer/seller consensus over any
discount has not been reached.
Industrial investment by region
Sources: Property Data, Gerald Eve
£ billion
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
Multi-regional portfolio Rest of the UK South East London
6 INVESTMENT BRIEFThe time to complete deals has lengthened given the increased We expect a slight deterioration of rents year-on-year in 2020,
scrutiny over covenant risk or void – buyers will typically except for UK distribution warehouses and London multi-let
want to speak with the financial director of the tenant and/or where values should hold. Risks are to the downside but we
examine their business plan. The legal process is also longer, in see some positive rental growth again in 2021 in line with the
part because the time to get searches back from local councils broader economic recovery while new supply will remain tight.
has increased.
Yields are moving out across all property segments but the very
Cash is critical for both parties. Consequently landlords will in low interest rate environment and underlying strength in the
some respects be more flexible with lease terms, but will also industrial occupier market means we expect a relatively modest
try to get some cash in sooner by, for example, offering a rent 40bps outward shift for industrial. This will pull total return
free as a half rent over double the time period. down to -3.5% for 2020 before a resumption of positive returns
from 2021, albeit mostly composed of income return and some
Expectations are that the proportion of rent paid will moderate rental growth.
deteriorate at the June quarter date. The changes to legislation
to make it more difficult to pursue non-payment of rent means
that defaults and an increase in voids are likely to be pushed to Industrial total return and components
later in 2020 and into 2021. However, this increase is not forecast Sources: MSCI, Gerald Eve
to be of a magnitude similar to the 2009 downturn, given the
lack of new supply – particularly for multi-let, where the tenant %, per year
base is also now stronger and more diversified. 25
Forecast
20
The spread of returns across different industrial segments has
narrowed now that yields are no longer compressing. 15
10
Industrial sectors annual total returns 5
Sources: MSCI, Gerald Eve
0
%, per year
-5
30
-10
25 2016 2017 2018 2019 2020 2021 2022
20
Rental growth Income return
Yield impact Total return
15
10
5
0
The industrial sector has fared better than other
Mar 2016
Jun 2016
Sep 2016
Dec 2016
Mar 2017
Jun 2017
Sep 2017
Dec 2017
Mar 2018
Jun 2018
Sep 2018
Dec 2018
Mar 2019
Jun 2019
Sep 2019
Dec 2019
Mar 2020
property types given the surge in occupational
demand immediately post-lockdown and the
London multi-let annual total return
acceleration of internet retail and the home
Outer SE multi-let annual total return delivery market. Secondary assets, which were
Distribution warehouse annual total return already showing signs of slowing down pre-covid,
Inner SE multi-let annual total return
have seen a small slippage in pricing, but there is a
ROUK multi-let annual total return
broad cross-section of buyers, especially for long
income distribution and smaller last-mile urban
logistics assets.
Nick Ogden
Partner, Capital Markets
INDUSTRIAL 7OFFICE
• Investment is weak while social distancing limits Transactional evidence shows an ongoing dichotomy between
viewings and the dichotomy persists between buyer buyer and seller pricing expectations. In regional markets, we
and seller valuations have seen evidence of value-add funds looking for 15-20%
discount on current valuations. In London, similar pricing trends
• The June quarter day rent collection is likely to be have occurred albeit less so, for example, Global Gate Capital’s
worse than March, potentially triggering sales in poor acquisition of 25 Maddox Street in Mayfair, transacted at
performing assets £57 million at the end of March, a discount of £7 million / 10.9%
compared to the original bid.
• The impact of covid-19 on capital values was felt
more in UK regional markets, with core London However, the incentive to sell now at discounted prices is
markets showing more resilience small, as vendors believe their buildings are currently protected
with appropriate financing and robust occupational terms.
• Overseas investors were most active in Q1, however, Additionally, the effect on the leasing market has not fully
as travel restrictions remain, UK based investors may presented itself, leading to reliance on backward-looking data
in negotiations.
be able to benefit from less competition
• Outward yield shift forecast to push total return to
-2.5% for 2020 UK office annual total returns and components
Source: MSCI
Investment activity in UK offices had an initially strong start to %, per year
the year with volumes in January and February totalling £3.3 35
billion, buoyed by robust activity in London. However, as the
30
uncertainty from covid-19 took hold and lockdown measures
were implemented, activity in March was hampered with only 25
£1.2bn transacted, a fall of 45% on February. 20
15
10
UK office investment volumes by region
and levels of uncertainty 5
Sources: Property Data, Economic Uncertainty Policy
0
£ billion Index -5
10 600 -10
Post-referendum Brexit Covid-19
uncertainty uncertainty
Mar 2015
Jun 2015
Sep 2015
Dec 2015
Mar 2016
Jun 2016
Sep 2016
Dec 2016
Mar 2017
Jun 2017
Sep 2017
Dec 2017
Mar 2018
Jun 2018
Sep 2018
Dec 2018
Mar 2019
Jun 2019
Sep 2019
Dec 2019
9 Mar 2020
500
8
7
400
6 Income return Equivalent yield impact
Capital growth Total return
5 300
4
200 Total return for offices fell to 3.3% in Q1 2020 driven by quarterly
3
outward shifts in equivalent yields in the South East and the
2
100 Rest of the UK. Income returns are more protected, as many
1 occupier sectors within the office segment have comparatively
0 0 healthy cash flows when compared with other sectors in the
economy, and, many have been able to maintain productivity
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
through remote working.
London Rest of the UK Pharmaceutical, tech and law firms are the most resilient, along
South East Uncertainty index (RHS) with portions of the finance industry, particularly those invested
in other asset classes. However, financial firms holding large
The level of uncertainty covid-19 instilled on the UK in Q1 can volumes of debt or loans will begin to struggle, as senior debt
be compared to the quarters following the EU referendum vote servicing and loan repayments become increasingly difficult.
and the initially-proposed UK exit date in Q1 2019 of March 23rd.
Historically, these periods depressed office investment and
it is expected that continued covid uncertainty will dampen
volumes for the remainder of the year.
8 INVESTMENT BRIEFDespite a large volume of dry powder in the market, the
Q1 2020 regional office capital value growth ability to allocate capital will be difficult for overseas investors
Source: MSCI as travel restrictions into the UK remain. Increased due
diligence has become a key consideration in new acquisitions
Annual change, %
to anticipate future liabilities associated with the current
4 uncertainty. Well-capitalised UK-based investors may be able to
3
take advantage of this reduction in competition and effectively
use pre-existing knowledge of domestic markets to secure
2 assets at a potential discount.
1
0 Annual total return and components forecast
Sources: MSCI, Gerald Eve
-1
%
-2
25
-3 20
City
West End & Mid Town
Rest of the UK
Rest of the South East
East Midlands
South West
Eastern
City
Mid Town
West End
Inner London
North West
West Midlands
North East
South East
Outer London
Yorks & Humber
15
10
5
0
Broad UK region Detailed UK regions
-5
The most recent capital value growth data from Q1 demonstrates -10
more resilience in London markets when compared with the Rest of
-15
the UK and South East. The West End was the only London market
2015 2016 2017 2018 2019 2020 2021 2022 2023
to experience a decline, with values falling 0.25% from Q4 2019.
There is more variance in regional valuations with positive growth
in the East Midlands and the South West. By contrast, Yorkshire and Capital growth Income return
Yield impact Total return
Outer London saw marked declines of 2.6% and 2.5% respectively.
We expect the forecast -6.5% decline in capital values to be
UK office investment by investor type, Q1 2020 driven by harsher pricing falls for secondary assets in 2020.
Sources: Property Data, Gerald Eve The outward movement of equivalent yields is forecast to cause
a negative yield impact of -6.5%, pushing forecasted total return
2% Private investor 6% Unknown negative to -2.5% for the year.
6% Occupiers
Since the start of the lockdown, transactional
17% UK institutions activity has inevitably decreased, given an
49% Overseas investors
inability to inspect and carry out full due diligence.
Transaction data during lockdown have indicated
core income-led assets let to robust-covenants are
20% UK prop co
continuing to trade at, or near, pre-covid pricing,
with little discernible discount. However, there is a
softening in pricing for value-add opportunities, with
Overseas investors were the most acquisitive investor type in
uncertainty around marketing voids and the likely
Q1, making £2.1 billion of acquisitions, of which £1.2 billion was in pause on rental growth. Willing vendors do however
London. The South East saw very little activity with only £369 million remain limited, so discounted sales are scarce.
transacted, a third of this volume was captured in CapitaLand’s
acquisition of Arlington Business Park for £129.3 million. UK Lloyd Davies
institutions were more active in regional markets making £328 Partner, Capital Markets
million of acquisitions, amounting to 45% of their total activity.
OFFICE 9RETAIL
• Retail property has been hit hard due to the impact The volume of retail investment transactions in Q1 was very low,
of lockdown measures and the accelerated switch with £837 million traded, only the second time this quarterly
to online figure has been below £1billion in the last 10 years. Deals that
were negotiated in late February, such as Orion European Real
• Annual total return fell further to -10% in Q1 Estate Fund’s £400 million purchase of seven UK retail parks
from Hammerson, have subsequently failed to complete.
• Retailers suffering significant cashflow difficulties Market valuation uncertainty, the unwillingness of lenders to lend
with quarter day rent collection weak and against retail and the severity with which the current crisis has
government intervention unlikely to be sufficient to impacted the retail sector suggests that the volume traded in Q2
stem tide of administrations will be even lower.
• Shopping centres saw 10.5% fall in capital values in Sectors that are highly dependent on consumption in social,
Q1 alone, with the largest shopping centres most crowded situations like hospitality, retail and recreation have
affected been most adversely impacted by covid-19 lockdown measures.
Footfall data suggests that shopping centre and high street
• Negative outlook likely to lead to more ‘repurposing’ visitor numbers suffered annual falls of over 85% in April.
of retail property to alternative uses, especially in
London This is reflected in property investment performance, with UK
shopping centres, particularly the largest shopping centres,
seeing significant falls in capital values and annual total returns
With an estimated 69% of stores deemed ‘non-essential’ and of -22.6% in Q1 2020. Landlords of such space have asked
therefore forced to close trading (rising to an estimated 83% lenders and bond market investors for ‘standstill’ agreements
including voluntary closures), the UK retail sector is generating given the lack of rental income and falls in underlying value
very little revenue outside of online channels. This has created a in order to prevent breaching debt covenants. Without such
hard stop in cashflow and a more bearish outlook by investors, measures, the future of large retail destinations is brought into
particularly for shopping centres and high street retail outlets. question, especially in a post-covid-19 world.
This in turn led to a sharp increase in equivalent yields in Q1 and
the -5% negative quarterly equivalent yield impact drove UK
Retail annual returns down to -10.5% in Q1 2020.
UK retail annual total returns and components Annual UK shopping centre total returns by property size
Sources: MSCI, Gerald Eve Sources: MSCI, Gerald Eve
%, per year % per year
15 15
10 10
5
5
0
0
-5
-5
-10
-10
-15
-15 -20
-20 -25
Mar 2016
Jun 2016
Sep 2016
Dec 2016
Mar 2017
Jun 2017
Sep 2017
Dec 2017
Mar 2018
Jun 2018
Sep 2018
Dec 2018
Mar 2019
Jun 2019
Sep 2019
Dec 2019
Mar 2020
Mar 2015
Jun 2015
Sep 2015
Dec 2015
Mar 2016
Jun 2016
Sep 2016
Dec 2016
Mar 2017
Jun 2017
Sep 2017
Dec 2017
Mar 2018
Jun 2018
Sep 2018
Dec 2018
Mar 2019
Jun 2019
Sep 2019
Dec 2019
Mar 2020
Annual income return Annual market rental growth Shopping centres: 0 – 7,000 sq m
Annual equivalent yield impact Annual total return Shopping centres: > 50,000 sq m
10 INVESTMENT BRIEFRecent performance data suggests that low yielding and central The internet retail market is one segment of the retail sector that
London retail assets have been more insulated against negative continues to grow, with online retail sales accounting for 30.7% of
market conditions. However, secondary and tertiary retail all retail sales in April 2020. This has brought the need for last mile
properties have seen significant outward yield shifts and the logistics solutions into sharp focus for many retailers with online
spread in pricing between prime and tertiary UK retail is now platforms, especially around London, and many are now making
at the highest level on record. Whilst it is encouraging that the long term plans to invest in their network capacity.
market is correctly pricing assets based on quality (especially
when compared to the low excess spreads recorded in 2007) For certain retail assets in and around London, repurposing to
such divergence reflects the increased price of risk and is likely industrial and logistics use is now a viable option. Monthly data
to push some tertiary retail assets down to ‘site value’ before suggests that equivalent yield spreads between London retail
generating investor interest. warehouses and London Industrial are now at 96bps, an all-time
high. With further falls expected in retail capital values, this will
strengthen the investment case for repurposing retail parks
and retail warehouses to logistics uses and could be a trend
Retail net initial yield – spread over prime we see more of in 2020. Amazon, for instance, purchased the 9
and tertiary properties acre former Pentavia Retail Park in Mill Hill, North West London,
Sources: MSCI, Gerald Eve
in May 2020 for £65 million, outbidding several residential
%
developers to secure the site for future logistics use.
4.0
3.5
The higher the spread, the higher the return an investor
3.0
requires from a tertiary retail property over a prime property London Retail Warehouse and London Industrial
equivalent yield and spread
2.5 Source: MSCI, Gerald Eve
2.0
% bps
1.5 10 100
90
9 80
1.0 70
8 60
The lower the spread, the less investors differentiate 50
between prime and tertiary retail properties 7 40
0.5 30
6 20
10
0 0
5 -10
Apr 2006
Apr 2007
Apr 2008
Apr 2009
Apr 2010
Apr 2011
Apr 2012
Apr 2013
Apr 2014
Apr 2015
Apr 2016
Apr 2017
Apr 2018
Apr 2019
Apr 2020
4 -20
-30
3 -40
-50
-60
2 -70
-80
1 -90
-100
0 -110
We have seen the effects of changing consumer -1
-120
-130
demand within the industrial and logistics -2
-140
-150
market where e-commerce and direct-to-
Apr 2009
Oct 2009
Apr 2010
Oct 2010
Apr 2011
Oct 2011
Apr 2012
Oct 2012
Apr 2013
Oct 2013
Apr 2014
Oct 2014
Apr 2015
Oct 2015
Apr 2016
Oct 2016
Apr 2017
Oct 2017
Apr 2018
Oct 2018
Apr 2019
Oct 2019
Apr 2020
door distribution has grown further as physical
retail outlets have been forced to close. We
are also seeing retailers start to review their London Retail Warehouse London Industrial
London retail warehouse and industrial yield spread (RHS)
infrastructure and look to a future of sustained
e-commerce and direct consumer interaction.
This could accelerate long term requirements to
meet demand and weakened retail assets around
London could suit some of these forward-
thinking online retailers.
Josh Pater
Partner, Industrial and Logistics
RETAIL 11HOTELS
• The UK hotels industry was instructed to close on
March 24th, with only long-term residents, key Change in performance indicators for hotels in London
Source: Statista
workers and NHS or government contracts allowed to
use services. %
5
• Many hotel operators are pessimistic about the
shape of the recovery for the hotel sector and are 0
implementing drastic cost-saving measures.
-5
These are in addition to government support
packages and involve looking at debt solutions and -10
working with landlords to secure rent relief support.
-15
• Many of the franchise hotel operators are ultimately -20
owned by large funds who are reticent to entertain
requests for significant rent reductions given their -25
own financial commitments and to avoid setting a -30
precedent for rent requests from other occupiers. Occupancy rate Average daily rates RevPar
• UK hotel capital value growth had been slowing since Feb 2020
early 2018, but a 15bps shift in yields in Q1 resulted March 1–7, 2020
in a 2% quarterly fall in capital values. Q2 is likely to
see much sharper falls and with hotels expected to
be slower than other sectors to see any benefit of a Hotel total return and components
relaxation of lockdown measures, we forecast capital Sources: MSCI, Gerald Eve
values to fall by 19% in 2020.
%
• Restrictions on international travel (including 14 20
day quarantine measures) and public gatherings are 15
likely to have a disproportionately significant impact 10
on airport and conference-centre-linked hotels in
5
the short term. Longer term, travel restrictions and
0
a rise of the ‘staycation’ industry may feed through
to increased domestic demand for UK tourist -5
destinations, as has been seen in Germany. -10
-15
• The budget and mid-range domestic market may
-20
see a faster rebound than the top end international
hotels, where any pickup in activity is often more -25
2015 2016 2017 2018 2019 2020 2021 2022 2023
dependent on international occupancy, although
once lockdown measures are relaxed we are likely to
Rental growth Income return
see in-town hotels reduce rates to compete.
Yield impact Total return
The hotel industry has been hit hard by covid-19 and as one of the sectors likely to see restrictions lifted
last under current government plans, the recovery will be longer. Branded hotels, given their potential to
withstand a hard-stop in revenue and leverage their covenant strength in the debt market, are likely to be
more protected than smaller independent hotels in the short term.
Will Kirkpatrick
Partner, Alternative Markets
12 INVESTMENT BRIEFLEISURE
• The imposition of lockdown measures to contain
the spread of covid-19 has effectively closed down Change in like-for-like sales during COVID-19
Source: Statista
the entire UK leisure industry, with most cinemas,
theatres, sports centres, holiday resorts and leisure %
parks shut for business. 0
• This has had major implications for leisure operators’ -10
cashflow and revenues and March quarter day rent -20
collection was weak.
-30
• The Corporate Insolvency and Governance Bill, -40
which includes a debt enforcement moratorium, and -50
prevents the use of statutory demands and winding
up petitions by landlords dated from 1 March and 27 -60
April, will help protect tenants in the short term, but -70
the sector faces significant challenges longer term -80
given social distancing is expected to be in force for All outlet Pubs Bars Restaurants
an extended period.
Before lockdown, March 9–15
• In turn, landlords are struggling with ongoing Remainder of March
operating costs and honouring financial
commitments to banks and investors. Whilst payment
deferral plans will provide some recovery of unpaid Leisure total return and components
rent, such is the scale of the contraction that an Sources: MSCI, Gerald Eve
increase in administrations and voids is expected
towards the end of 2020. %
15
• Leisure property capital values fell 6.2% on an annual 10
basis in Q1 following a 25bps outward yield movement.
We forecast an overall 15% fall in capital values over 5
2020 and for the sector to take longer to recover than
0
other less covid-affected sectors.
-5
• The volume of leisure investment transaction in
Q1 was weak, with mainly occupiers and private -10
investors committing to purchases. -15
• The outlook for the leisure sector looks bleak in -20
the short term as even if public confidence returns, 2015 2016 2017 2018 2019 2020 2021 2022 2023
social distancing measures are likely to remain in
place and greatly reduce capacity. Risks for the Rental growth Income return
leisure and hospitality industries are firmly skewed Yield impact Total return
to the downside.
• Longer term, the leisure sector could be a beneficiary
of a recovery in real wage and consumer spending
growth in 2021, but some subsectors, particularly
those reliant on tourism and mass gatherings are
unlikely to benefit.
LEISURE 13CORPORATE FINANCE
Property lending slowed 13% in 2019, given prevailing concerns over Brexit and the market
uncertainty in the lead up to the general election. Post-election, the market started the year on a
stronger footing. However, covid-19 has firmly put the brakes on the lending market.
Caution prevailed and lenders who were already wary of the retail sector saw covid-19 also severely
impact the hotel, leisure, student housing and commercial speculative development funding
markets. Whilst the construction industry made every effort to return to site after the initial covid-19
lockdown in March, the hold up in the supply of building materials means that development loans
are likely to be impacted by construction delays or defaults on construction contracts. This will
require lenders to extend loan terms and meet the increased costs brought about by projects
overrunning and going over budget.
Defaults on loans are up 36% since March 2019 and increased lending costs and loan defaults are
expected in 2020, with the risk driven by an inability to service interest and valuation difficulties.
Emphasis has been placed on the rental quarter days and whilst the March rent collection varied
from 30% for retail to over 90% for some logistics landlords, the full impact of the lockdown has
not yet been felt. Rent collection rates for the June and September quarter days are likely to be
worse, and there are concerns on the level of defaults lenders will begin to see.
The change in capital treatment for loans struggling with interest payments due to covid-19 will
offer short-term relief. However, in the longer term, some businesses will fail, and the losses of
these loans will need to be reflected in lenders’ balance sheets. We have already seen the larger
lenders, who are themselves also grappling with the impact of weakening oil prices, significantly
raising bad debt provisions. HSBC and Barclays have announced £8.8bn and £4.5 billion
respectively to cover bad debts in 2020, the biggest provision for credit losses since the
eurozone debt crisis in 2011.
Since the start of April, lenders have adopted tighter underwriting criteria and have increased
margins by an estimated 40-70bps on secondary property loans and slightly less for prime.
The impact of these margin rises has been offset in part by the reduction in the base rate to
0.1% and the reduction in both LIBOR and 3 and 5 year swap rates. However, many lenders are
now imposing ‘floors’ in their interest definitions to protect their position, with floors of between
0.25% - 0.75% being recorded.
We believe that lenders are likely to continue to increase lending costs to recover losses and
write-offs, as the underlying decline in credit triggers immediate increased capital costs and
tighter underwriting leads to further higher lending margins.
SOLD New debt in 2020 is likely to be driven by refinancing and restructuring rather than to finance new
property acquisitions, although some opportunistic debt funds have significant amounts of capital
that they are keen to lend at a time of potential market inflection.
14 INVESTMENT BRIEFAnnual loan originations by lender type Annual defaulted loans by lender type
Source: Cass Commercial Real Estate Lending Survey, May 2020 Source: Cass Commercial Real Estate Lending Survey, May 2020
£ billion £ billion
90 40
80 35
70
30
60
25
50
20
40
15
30
10
20
10 5
0 0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
UK banks & building societies North American banks UK banks North American banks
German banks Insurance companies German banks Insurers
Other international banks Other NBL Other banks Other lenders
Long term commercial property debt cycle
Sources: Cass Commercial Real Estate Lending Survey, May 2020
£ billion
350
300
250
200
150
100
50
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
UK bank debt Other bank debt Insurance debt Non-bank debt CMBS Other secured debt
Debt funds are likely to hone-in on income risk and covenant strength, with many only lending on assets
which have some degree of long term covid-19 resilience. Projects which meet this stricter criteria will still
see more conservative loan-to-value ratios and cash reserve provisions to cover interest payments.
Steven Oliver
Director, Gerald Eve Corporate Finance
CORPORATE FINANCE 15FURTHER INSIGHT
For more information on individual sectors, please see the following publications:
1 2 3 4 5 6
MULTI-LET PRIME LOGISTICS PRIME LOGISTICS
The definitive guide to the UK’s The definitive guide to the The definitive guide to the
multi-let industrial property market UK’s distribution property market UK’s distribution property market
Spring 2020
Summer 2019 Q1 2020 Bulletin
COMING
27 28 29 30 31 32 33
SOON
27 28 29 30 31 32 33
33 34 35 36 37
geraldeve.com geraldeve.com geraldeve.com geraldeve.com
33 34 35 36 37
Multi-Let Multi-Let Prime Logistics Prime Logistics Bulletin
Summer 2020 Summer 2019 Spring 2020 Q1 2020
1 2 3 4 5 6
SOUTH EAST OFFICE LONDON MARKETS
INVESTMENT BULLETIN Analysis of the
INDUSTRIAL SNAPSHOT
London office market
Q1 2020
Winter 2019/2020
THE IMMEDIATE
AND LONG-TERM
IMPLICATIONS OF
COVID-19 ON THE
I&L SECTOR
geraldeve.com geraldeve.com
South East Office London Markets
Investment Bulletin Winter 2019
Q1 2020
16 INVESTMENT BRIEFCONTACTS
UK Capital Markets Healthcare Corporate Finance
John Rodgers Richard Moir Steven Oliver
Partner Partner Tel. +44 (0)20 3745 5892
Tel. +44 (0)20 3486 3467 Tel. +44 (0)20 7333 6281 Mobile +44 (0)7908 622355
Mobile +44 (0)7810 307422 Mobile +44 (0)7771 812249 soliver@geraldeve.com
jrodgers@geraldeve.com rmoir@geraldeve.com
Property Asset Management
London Offices Portfolios Jennifer Cottle
Lloyd Davies Leo Zielinski Partner
Partner Partner Tel. +44 (0)203 486 3497
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Mobile +44 (0)7767 311254 Mobile +44 (0)7980 809031 jcottle@geraldeve.com
ldavies@geraldeve.com lzielinski@geraldeve.com
International
Alternatives/Long income Leisure Hettie Cust
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Partner Partner Mobile +44 (0)7920 267523
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Mobile +44 (0)7825 721289 Mobile +44 (0)7776 161821
rlines@geraldeve.com danning@geraldeve.com
Research
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Valuations Senior Associate
Michael Riordan Tel. +44 (0)20 7333 6288
South East Offices Partner bclarke@geraldeve.com
Guy Freeman Tel. +44 (0)20 7653 6828
Partner Mobile +44 (0)7796 611127 Oliver Al-Rehani
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gfreeman@geraldeve.com Mobile +44 (0)7584 112501
Hotels oal-rehani@geraldeve.com
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Regional Investment Partner
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