July 2020

Our Commercial Market Outlook, published by our research team, is continually being reviewed and updated with our latest insights. If you would like to find out about how the current market changes will impact on your property needs, please contact us. 

  • The COVID-19 pandemic has created the biggest shock to the UK and global economies since the Second World War. This is an external shock, the severity of which has accelerated with immense speed. Unlike most previous downturns, it is occurring across virtually all major global economies both severely and simultaneously.
  • The social distancing measures and forced business shutdowns introduced by the Government have been highly restrictive and unprecedented, severely impacting the supply side as well as the demand side of the economy. The hit to economic growth has inevitably been substantial and the UK’s output has plummeted by a quarter since the start of the COVID-19 crisis. To put this into context, the lowest drop of any quarter over the last years has been 2.7%, and output in now back to its level of two decades ago.
  • Almost all sectors of the economy have seen output contract sharply, although the extent has varied considerably. Those areas most heavily impacted include hospitality (-50%), construction (-45%), private administration/support services (-36%), and wholesale/retail (-34%). The manufacturing sector has seen a fall more in line with the UK average (-28%).
  • Falling tax receipts and the massive government support package have combined to increase government borrowing to a colossal £55 billion during May. As a result, public sector net debt has risen to 100.9% of GDP, the first time it has exceeded 100% since the 1960s. The Government has indicated that it will not follow the “austerity” policies adopted after the financial crisis and will be focusing on investment, particularly housing and infrastructure. Public sector debt is therefore likely to remain high into the medium term, although debt should be manageable at this level given the ongoing low interest rate environment.
  • The length and depth of the downturn is highly uncertain, and is largely dependent on external factors, including the path of the virus globally; the extent to which it can continue to be suppressed in the UK; and the success of ongoing policy interventions on social distancing, fiscal and monetary policy and other stimulus measures. The path to normality will not be straightforward; further local lockdowns are almost inevitable, and the risk of a broader-based second wave of the outbreak is very real. Looking further ahead, the speed with which the bioscience sector can develop and mass-produce a vaccine and / or medication to assist recovery is a key unknown.
  • The June Consensus forecasts suggest a fall in UK output of -9.2% for this year, followed by +6.5% next year. Any forecasts are highly speculative at present, but this suggests a return to pre-COVID-19 output in 2022. Business confidence surveys have significantly improved. The IHS Markit/CIPS UK Services PMI rose to 47.1 in June 2020 compared with a low of 13.4 in April and not far below the 50 mark (above which indicates expansion). Manufacturing is now into expansion territory (just) at 50.1. Much will depend on the level of economic "scarring”, where output is permanently lost through rising unemployment and business insolvencies, limiting the speed with which recovery can occur. The global context is also important – in June the IMF reduced its forecast for global growth this year to -5%, compared with the -3% it expected in April.
  • Prior to crisis, UK employment was at a record high and unemployment at a record low. The COVID-19 crisis has been a huge disruptor, with over 9 million employees furloughed (over a quarter of the workforce) and 2.6 million claims have been made under the Self-Employed Income Support Scheme. In addition, millions of employees are working at home rather than their usual workplace. There is a significant lag between the official unemployment statistics, which only cover the period up to the three-months to April, with the unemployment rate still reading 3.9%. However, the total number of hours worked fell by 8.7% compared with previous three months. In the period March-May, job vacancies saw a record fall of 342,000 compared with the previous three months.
  • The furlough scheme is due to wind down in stages, with employers required to contribute a rising share of wages until the scheme ends in October. Further Government support measures were announced in July, most notably the Job Retention Bonus (a one-off payment of £1,000 to employers for every furloughed employee continuously employed until the end of January 2021), but there is a limit to what these can achieve. A recent YouGov survey found that 51% of businesses intend to make redundancies within three months of Furlough expiry, and only a third felt confident that all their staff would be kept on.
  • Unemployment will rise significantly despite Government support, and a wave of recent corporate announcements on job losses are a sign of things to come. The current consensus forecasts suggest the unemployment rate will reach 7.9% by the end of the year.
  • Public sector employment is largely unaffected, a key difference to the austerity of the Global Financial Crisis. Indeed, the public sector has been hugely stretched in dealing with COVID-19, and will probably be considerably larger after the crisis, as some industries will require long-term government support. However, many parts of the public sector are now under severe financial pressure. This includes local councils, and the Government has announced a package of support measures.
  • As restrictions are eased, the Government has the unenviable task of balancing public health risks with the need to stimulate the economy. In England, most hospitality venues and some personal care outlets were able to reopen from 4th of July. However, the need to be “COVID-19-secure” and continued social distancing means this will be far from business as usual. Some businesses may simply not be able to operate at profitable levels and therefore may not re-open. Government support announced in July is designed to entice customers back to restaurants and bars. The “Eat Out to Help Out” scheme which will entitle diners to a 50% discount of up to £10 per head at participating venues on certain weekdays during August; and a reduced rate of VAT (5%) will apply until 12 January next year.
  • The UK’s corporate sector was in robust health prior to the crisis, and emergency Government measures such as the ability for businesses to defer VAT, a targeted business rates holiday and cash grants have been designed to ensure that as many businesses as possible survive the crisis. However, the severity of the downturn is likely to hasten the demise of businesses that were already struggling (most notably in the retail and hospitality sectors).
  • Co-ordinated action between the central banks of the major advanced economies to lower interest rates and boost the money supply has been a key part of the global response. This has been in sharp contrast to a highly disjointed global political response. The Bank of England cut interest rates to an all-time low of 0.10% and has injected £310m of quantitative easing into the economy since the start of the crisis, with more likely to follow. 
  • Inflation has fallen sharply, with CPI now at 0.5% (May 2020), well below the Bank of England’s target rate (2.0%). It is likely to fall a little further and could record a figure close to zero (with some very mild deflation possible) in the coming months before rising again. The Consensus forecast suggests it will be 0.7% at the end of this year, and 1.6% by the end of 2021.
  • With confirmation that there will be no extension to the transition period, Brexit has significant potential to hold back UK recovery, although there will probably be an interim solution if a deal is not agreed by this autumn. There will also be a host of other long-term implications from COVID-19, which are unknowable at this stage, although the following sections suggest some areas to consider across the commercial sectors.
  • The UK and global economies are experiencing an unprecedented shock, not only in the speed and scale of the downturn, but also the amount of change it is generating as we have adapted the way we live, work and shop. Much of the change now under way will be a permanent shift, and will reverberate across the commercial property sectors long after the COVID-19 crisis has receded.
  • The Government has announced that it will introduce legislation to permit greater change of use of commercial property without the need for planning consent, for example allowing redundant retail property to be converted into residential or offices. This should be in place by September. Adding additional space above existing buildings will also have a fast-track approval process. Furthermore, proposals for comprehensive reform of the entire planning system will be set out later this month. This has the potential to be an important tool in responding to the immense structural change now under way. 

Note: Consensus forecasts refer to the comparison of independent forecasts for the UK economy, compiled by HM Treasury.

If you would like to find out about how the current economic changes may impact on your property needs, please contact us.

  • Even before the COVID-19 crisis, the shift of retailing online, combined with rising costs, was reducing retailers’ profit margins, and there has been a continual drip-feed of established national operators going into administration, entering into CVAs or announcing store closure programmes. COVID-19 has significantly exacerbated these challenges. Online sales have continued to increase their market share at pace, accounting for 32.8% of total sales in May this year compared with 18.8% in May 2019 and 11.7% five years ago. It is likely that much of the increased use of online delivery during the crisis will be permanent, meaning a one-off acceleration, although the extent is unknowable at this stage.
  • The reopening of non-essential retail in June and much of the hospitality sector (plus parts of the personal care sector) from 4th July is of course welcome news. However, consumer expenditure will remain subdued due to the economic constraints (reduced household incomes and subdued confidence) plus the impact of the virus itself (with consumers either unable or unwilling to visit venues). The latest GFK consumer confidence index stood at -30 in June, up from a low of -34 in April and May, so remains close to historic lows. On the positive side, consumers are relatively sanguine about their personal finances over the next 12 months (-4), but highly pessimistic about the general economic situation going forward (-48). It is very possible that consumers will adopt higher saving levels and reduce consumption for some considerable time after the COVID-19 crisis is over.
  • The supermarket and foodstore sector has been trading exceptionally well since the start of the COVID-19 crisis, benefitting from demand diverted from the hospitality sector. The national discounters were one of the few very active sectors prior to the crisis, taking advantage of larger vacant units, and they are likely to continue their expansion in the post-crisis period.
  • The Government’s fiscal intervention will help to mitigate retail closures and job losses but only to some extent, and an acceleration of closures is inevitable. The Centre for Retail Research has predicted that more than 20,000 stores could permanently close across the UK this year, a significant increase on 2019.
  • The list of retailers and food & beverage operators who have gone into administration since the start of the crisis is steadily growing. Casualties include Beales department stores, Brighthouse, Byron, Café Rouge/Bella Italia, Cath Kidston, Harveys Furniture, Laura Ashley, Oasis, Oddbins, T.M. Lewin, and Victoria's Secret. Further weaker players are likely to go under. Department store Debenhams has also appointed administrators for the second time as protection from its creditors and has announced further store closures. Many retailers will not re-open all their outlets once restrictions are lifted, and more may become online-only. There is also a lengthy list of major retailers who will permanently close some outlets following the lockdown, including key anchor occupier John Lewis.
  • With the retrenchment of many national retailers in recent years, high street letting activity had become increasingly focused on local independent operators, favouring some secondary pitches with more affordable rental levels. A key question is therefore around the survival rate of these independent outlets that do not have access to the same resources or management experience as the national operators.
  • The problems in the retail sector are brought into sharp focus by the downfall of Intu Properties, which went into administration in June. It owns 17 UK shopping centres including the Trafford Centre (Manchester), Lakeside (Thurrock), Merry Hill (Birmingham), the MetroCentre (Newcastle) and the Victoria Centre (Nottingham). Although its centres remain open, they are not all guaranteed to survive, and any closures would represent major setbacks for their respective retail locations.
  • Locations with a high tourist footfall have tended to be relatively successful in recent years. These centres are likely to face a lengthy period where overseas tourism is significantly reduced, even after most of the domestic restrictions are lifted, and some hospitality venues may not reopen in these dependent areas until the next season.
  • Overall, the UK retail market has an oversupply of units, although this varies widely both between and within markets, and average retail rental values were falling across the UK prior to the COVID-19 crisis. The latest figures from the MSCI Monthly Index (May 2020) show that average retail rental values fell by an annual rate of 6.5% as the re-basing of rents continued. The rate of decline has accelerated, with a fall of -2.7% in the three months to May (an annualised rate of -10.5%). This puts average rental values nearly 20% below their all-time peak in 2008.
  • The retail sector was already in a state of flux prior to the COVID-19 crisis, and with oversupply and continued insolvencies and CVAs, there is considerable uncertainty around where rental levels may eventually find a floor. COVID-19 will accelerate the process of change and adaptation that was already under way on the UK’s high streets.

If you would like to find out about how the current retail market changes may impact on your property needs, please contact us.

  • Prior to the COVID-19 crisis, the politics of Brexit had caused immense uncertainty for UK businesses over a three-year period, holding back corporate decision-making. The actual impact of jobs moving overseas was minimal, and there is evidence that Brexit-related uncertainty benefitted the labour market, as firms lacked the confidence to invest and instead hired workers. This has been supportive of occupier demand, and take-up in most major city centres has been robust in recent years.
  • The COVID-19 crisis is now having a significant impact on the corporate occupier sector, as businesses put relocation decisions on hold and assess impact on revenues and staff headcount. We have seen a significant reduction in letting activity in Q2 across the key commercial centres.
  • An increasing number of high-profile corporate redundancy programmes are being announced. A reduction in employment will mean some businesses reducing the space they occupy. Office vacancy will rise, especially in the second-hand market as schemes under construction complete, some businesses ceasing trading, flexible space operators reduce capacity, and more businesses choose to exercise break options or fail to renew at lease end. Tenants with lease expiries may decide to defer office moves and seek short-term lease extensions until economic conditions become more certain.
  • A broader structural change in the office sector now looks to be in progress and COVID-19 is significantly accelerating the existing trend towards increased home working. However, it could also bring into sharper focus the importance of office space as a place to communicate, share ideas, and foster team spirit and corporate identity.
  • Falling employment and increased remote working will inevitably mean less office space is required. However occupational densities may reduce as the role of the office changes, which could offset this to a limited extent.
  • The flexible space market (or serviced office sector) has expanded rapidly in recent years, with demand moving up the size curve and rippling out from London to the regional markets, and it has underpinned demand in the office market. The COVID-19 crisis will be a major test for the sector, with its income levels clearly at risk as tenants fail to renew leases.
  • Whilst office demand remained relatively strong prior to the COVID-19 crisis, the supply of quality space has been highly constrained. Construction activity has been subdued ever since the financial crisis a decade ago, and has been on a downward trend over the last two years. As a result, there is a shortage of grade A supply relative to robust demand in many markets, which will help to cushion rental falls at the prime end.
  • According to the MSCI Monthly index, average UK office rental values have been broadly stable over the last three months and are 1.4% higher than a year ago.

If you would like to find out about how the current office market changes may impact on your property needs, please contact us.

  • Industrial take-up has been buoyant in recent years as retailers and their third-party logistics partners adapt to growing online demand. The convergence of traditional supply distribution chains continues to fuel demand for both large distribution warehouses and smaller urban units for last-mile delivery. The grocery sector has seen robust demand and have been adapting its supply chains, for example to cater for increased selling direct to consumers rather than the hospitality sector.
  • The crisis may accelerate the rate of change in the sector if shoppers continue to order more goods online. It is also likely that companies will re-examine their supply chains, which have become increasingly long and complex as globalisation has increased. Indeed, the commercial and political impact of the crisis could halt the spread of globalisation, at least in the short term.
  • Just-in-time manufacturing has reduced the need for storage and is reliant on these complex supply chains. We are now seeing the impact when they fail to operate properly, for example in the automotive sector. The lack of resilience in the manufacturing sector is likely to add to the argument for “reshoring”, leading to increased demand for storage space in the UK.
  • There remains a severe shortage of well-located sites for distribution use, and also urban sites suitable for last mile delivery, waste recycling and open storage. Overall, it has been hugely challenging to satisfy occupier demand, creating strong upward pressure on values. 
  • According to MSCI, average industrial rental values are continuing to rise, illustrating the extent to which the sector is COVID-19-resilient. Average UK rental values rose by 0.3% in the three months to May, and are still 2.7% higher than a year ago (Monthly Index, May 2020). Supply shortages and structural change will combine to cushion the sector from the worst effects of the crisis, and rental performance should continue to be the least impacted of the three main commercial sectors.

If you would like to find out about how the current industrial market changes may impact on your property needs, please contact us.

  • Investor demand for UK commercial property had been remained robust over a sustained period prior to the COVID-19 crisis. However, some UK and overseas buyers had been adopting a ‘wait and see’ approach to potential purchases, primarily due to the uncertainty surrounding Brexit, and some investors had also put a moratorium on retail purchases. Few investors have been under pressure to sell, and so transaction levels had been relatively subdued.
  • The first three months of 2020 saw £15.3 billion transacted, which compared favourably with £11.5 billion in the same quarter of 2019 (although the 2020 figure was boosted by a small number of very large transactions). The majority of Q1 was pre-lockdown, and volumes are inevitably heavily down in Q2, with transactions totalling only £2.5 billion reported to date.
  • There have been few forced sellers, although cashflow is a major risk for property owners as tenants have deferred rental payments (as permitted by emergency legislation), negotiated rent reductions, or simply defaulted. There is also a question over the retail funds, which are currently gated, and whether investors will pull out funds, increasing the level of forced sales.
  • Landlords are increasingly likely to offer short term leases rather than incur the potential loss of income and additional costs of vacant space. If void rates rise rapidly, landlords will come under increasing financial pressure.
  • In the medium term, property’s fundamental attractiveness will be unchanged by the COVID-19 crisis, although there will be specific impacts which will vary according to sectors, some of which we have highlighted above.
  • The financial markets have reacted sharply to the crisis. The FTSE all-share index fell by over 30% between mid-February and mid-March, although it had recovered some ground to less than 20% below its pre-crisis level by the early July. The market will remain volatile until there is a clear path back to normality.
  • 10-year gilt yields have been on a long-term downward path, as the global economy has shifted to a lower interest rate environment. With investors flocking to safe assets and emergency interest rate cuts, the 10-year gilt yield has now fallen to just 0.2% at the time of writing. This compares with the all-property equivalent yield of 6.3% (MSCI Monthly Index, May). This makes property look a relatively safe and stable asset, with a highly favourable yield against the risk free rate, and should encourage further flows of capital into the real estate sector.
  • Global interest rates are so low that cash needs to look for a return, and the pricing for prime investments on long leases remains strong. This is a key differential from the financial crisis when pricing fell across the whole investment spectrum. That said, the definition of what is considered as prime is narrowing, as is usual in a downturn.
  • The MSCI all-property equivalent yield has risen by 30 basis points between February and May, with retail seeing a much steeper upward shift of 60 basis points. All-property capital values fell by 5% in the three months to May, but retail values fell by nearly 10%. On an annualised basis all property capital values fell by -19% in the three months to May compared with -7% over 12 months. With values continuing to move downwards, the annual rate clearly has much further to fall.
  • The outlook for values over the next year is highly uncertain. Not only are we in an unprecedented and unpredictable economic situation, but the COVID-19 crisis is accelerating the already significant structural change across most key commercial sectors. This is reflected in the latest IPF consensus forecasts, with the average across all forecasters suggesting a fall in values of 12.4% for 2020, but ranging from -4% to nearly -20%.
  • The impact of COVID-19 will not be spread evenly across the property market. Prime property should prove relatively well insulated due to the underlying supply shortage, which will continue to be a key feature of the market. Existing sectoral trends are likely to be accelerated, setting even more starkly the differences between sectors such as distribution, last mile delivery and office space on the one hand against secondary offices and retail on the other.
  • Despite the challenging market conditions there are many areas of resilience. Low development rates and a lack of supply should continue to support rental values at the prime end of the market, with some sectors particularly resilient or even thriving, including distribution warehousing, urban “last mile” delivery and laboratory space. In addition, pricing for long leases should remain highly competitive.

If you would like to find out about how the current investment market changes may impact on your property needs, please contact us.

For further information on the current market, or to speak directly to one of our commercial property professionals, please contact us.

@ Scott Harkness
Scott Harkness
Partner - Head of Commercial Division
020 3993 8757 email me about Scott
@ Daniel Francis
Daniel Francis
Head of Research
020 7518 3301 email me about Daniel

Scott specialises in providing advice on agency and development matters to a wide variety of clients from private individuals and trusts through to property funds, institutions, companies and statutory authorities.  He advises both owners and occupiers across public and private sectors.

Working at Board level with clients, Scott’s specialist areas include Business development, development of property strategies, property investment advice, advice in the marketing and disposal of property as well as property acquisitions.

Scott has a particular knowledge and understanding of the property market in the wider Oxfordshire region whilst also operating on a national basis on specific projects.

I can provide advice on:
Daniel Francis has been Head of Research at Carter Jonas since 2018. He is responsible for delivering the firm’s programme of market and topic-based research, providing clients with the insight they need. Daniel’s main focus is the commercial market, and he works closely with his rural and residential research colleagues. 

Daniel is a member of the Investment Property Forum and the Society of Property Researchers.
I can provide advice on: