The mood among UK property investors is fearful as Covid-19 has put particular pressures on them in office, retail and buy-to-let properties.
The ban on terminating leases for non-payment has caused severe short-term financial pressure for many. Some investors are even concerned about the long-term future of commercial property as an investment-grade asset.
Some fear that reduced demand for retail space may become permanent. Even before Covid-19 hit, the high street was under severe pressure as shopping moved increasingly online; this trend has been rapidly accelerated by the pandemic. Rental income streams have dried up as businesses closed and footfall fell.
This trend may change typical retail leasing arrangements. The leasing of smaller units for shorter terms may become commonplace. Rents could increasingly be based on a percentage of turnover. Such market changes will ultimately alter rental returns and asset values.
Meanwhile, in the office sector, the pandemic has caused a massive shift towards working from home. Many organisations found this enforced experiment to be very successful and plan to continue flexible working even after the pandemic ends. Only time will reveal the full extent to which UK office working becomes remote. For now, large office developments will likely remain unattractive to investors.
In the buy-to-let investment market, rising property prices show that the UK has a massive unmet demand for homes. Residential landlords have nonetheless been badly hit by the government’s ban on the eviction of non-paying tenants – even where they can pay. Many landlords see this as a charter not to pay rent. Despite reduced returns, the fact that asset values are holding up gives some comfort.
The government is proposing major changes to the planning system to increase the supply of residential property. This may mean that greenfield and brownfield land that is available for residential development becomes significantly more valuable for investors in this market.
Peter Robinson is a partner at Hunters Law