As the hospitality sector starts to turn the welcome lights back on, does it flick a switch for the commercial property market?

14 Jul 2020

In recent weeks, UK lockdown restrictions have started to ease, allowing shops to reopen and pubs to pour beloved, sorely missed pints. Whilst the 2019 general election and Brexit brought much-needed assurances to real estate investors, the uncertainty shrouding COVID-19 has the potential to disrupt UK property market trends for good.

Now, Rishi Sunak’s recent announcement of emergency economic measures has demonstrated a bid from the UK government to resuscitate the British hospitality sector. However, UK retailers have felt somewhat neglected by the summer economic budget. Their struggle to attract and retain business will ultimately impact on their ability to stick to contractual obligations with their landlords. In the office real estate space, how will landlords be able to protect their return on investment in a post-COVID, homeworking era?

Can A New Code of Practice Help Retailers Survive the Storm?

It’s no secret that the UK’s High Streets have been in a state of decay for some time. The “Amazon effect” has long redesigned the competitive landscape, customer expectations and shopping patterns, to which traditional brick and mortar retailers have struggled to adapt. The challenges faced by this particular marketplace have only been exacerbated by furloughs and the decreased spending that will come with a recession. What’s more, the pandemic has proven the value of e-commerce and online shopping.

A recent government code of practice seeks to provide a template for cooperation between landlords and tenants when managing commercial property relationships during this time. But the reality is that the code is voluntary and landlords are facing strict limitations on their rent recovery options. If rent arrears become a long-term issue (and most landlords would say that two quarters is already long-term enough), it is likely that the value of retail properties will decrease considerably. Now more than ever, landlords who want to protect their investment should be seeking legal advice on potential new lease arrangements which may mutually benefit both the tenant and the landlord and ensure long-term profitability, even at the cost of some short term pain.

Reviving Hospitality and Service Providers – an Indication of Real Estate Investment Trends to Come.

Whilst COVID has simply accelerated a downward trend with retailers, service providers (such as hairdressers), restaurants and hotels, which were not previously affected by the decline of British highstreets, formed one of the hardest hit sectors during lockdown. The hospitality and tourism sector is one of the biggest employers nationwide, with the number of its furloughed workers (1.4m) the highest of any industry. Now, a slash on VAT and discounts on meals out will form part of the government’s plan to reboot this sector.

Sunak’s attention on tourism and hospitality venues clearly indicates where the British government foresee future growth in the economy. “Our economy relies on consumption, especially social consumption”, stated Sunak, and savvy property investors should be taking note.

 Office Property is, Historically, a Good Bet.

The office property market is likely to go through huge changes as homeworking becomes the new norm. But this market has generally been able to match supply with demand; if inflation is taken into account, the average rents in London are the same as they were 100 years ago.

Given the social nature of human psychology, it seems unlikely that companies will shift to completely remote working. We may see office space landlords changing their business model (to a shared office, for example) or redeveloping their properties to tie into a growing trend for using office space to promote employee wellness as well as commercial activity. Where some offices can’t adapt to suit employment trends, it is likely that the spaces will be repurposed as residential homes. London office blocks, for example have been converted into residential properties (although this has sparked controversy).

Despite this unsettled period, investing in the right kind of commercial property during this time can pay dividends. The market has proven to be flexible with changing societal needs, but real estate investors will need to consult both lawyers and property specialists on the ever-changing market trends to benefit from this long-term investment. There is a light at the end of the tunnel for investor landlords, the key is keeping a glow until the end of the COVID crisis.

Article written by: Syvanne Aloni