With the reopening of non-essential retail spaces today following three months of closure under lockdown, Ian Forrest, Investment Research Analyst at The Share Centre, discusses how the property sector has weathered the storm of Covid-19 and the trends that are expected to define the sector going forward.
Ian says: “The commercial property sector has been one of the most heavily impacted by the Covid-19 pandemic, and the lockdown could have some long term consequences. Faced with the closure of retail and leisure facilities over an extended period it has not been surprising to hear of a fall in rental payments to landlords. Two of the largest in the sector, British Land and Land Securities, have both highlighted this in recent statements.
“As shops gradually reopen the situation should slowly improve but the ongoing social distancing measures mean that some retailers may need quite a lot of help from landlords to stay in business. With many people having turned to online shopping in recent months there’s also a question about how much of that spending will return to the high street when all the restrictions are finally lifted. This is a trend which has been moving in that direction for several years and Covid-19 may simply have accelerated it.
“The position for office and industrial property is better, especially in prime urban areas, as many companies have been able to continue in operation with staff working from home. However, some analysts are now wondering if the very success of that change in behaviour could ultimately lead to longer-term structural changes in demand for city-centre office space. Research published by property services group CBRE* in May showed over 90% of commercial tenants expected to increase the amount of working from home capability after the pandemic has ended, and 44% of company employees also think there should be more working from home in future.
“Its unlikely corporate tenants will leave urban areas altogether but some may reduce the amount of space they occupy. Some big developers are already talking about changing the use of some of their retail properties to residential and leisure services, and that could also happen to office space over time.
“For investors, it would be wise to note the suspension of a number of funds in recent months which invest mainly in physical property. That was mainly due to a lack of reliable valuation data. In relation to individual property development companies, many are trading at very large discounts to their asset values, but investors will want to see some stabilisation in those values and greater confidence about dividend payments before they find the sector attractive once again.”
