Brave new world. The relationship between your business and property has forever changed.
The optimist in me is always ready to embrace change – and it got me thinking about how the current situation compares to previous downturns and the impact on property.
All other recessions had something in common – you could always grab a coffee with a friend or jump on a plane to get away from it all.
With lots of uncertainty in our lives, one current certainty is that social distancing is creating an economic deep freeze unparalleled in living memory.
Taking learnings from the past
In the late 1970s recession I saw my father/businessman/textile merchant adapting to the decimation of the UK’s textile industry in favour of low-cost locations. Garments could be made more cheaply in the Far East than in Manchester. Globalisation.
In 1987 a natural event was the tipping point for market correction. With hind-sight nothing much happened. The 1991-92 recession was caused by UK government action and was UK specific, causing a drop in our GDP of 1.9%. There are parallels with 2020: Over a period of 12 months the market ground to a halt and in some areas of commercial property there was no market. Coming out of that recession with the right approach enabled long rent frees to be negotiated as landlords took refuge in a tenant meeting their holding costs.
Few predicted the 2008/9 recession. GDP fell by 6.2%. Rent frees on office property could be negotiated at around 12 months – 50% less than 1993, rental values for industrial and distribution properties remained stubbornly high. ‘A forest of boards’ frequently witnessed in 1992 was absent in 2009. The market held. Deals could be done but the market remained pretty firm and tenants were still denied a decent turn in the driving seat. Reasons: Less spec build due to change in rating legislation, companies that should have failed received support and limped on. Fewer failures meant less vacancy. Lower interest rates rescued landlords and property developers resulting in fewer opportunities.
The situation today
The 2020 recession combines a global natural event with global government intervention.
SBM represents tenants and occupiers of commercial buildings in their dealings with landlords and during the last two weeks we have held conference calls with over 50 business leaders. We have held another 50 conference calls with our team members who have many decades of experience in the property market. At SBM we will always look at property as a means (for our clients) rather than an end goal. We believe it is the tenants and the occupiers – not the providers of buildings – that create true economic value.
Many commercial tenants particularly in the retail sector have stopped paying rent – irrespective of whether or not they understand the truly limited nature of the reprieve from forfeiture. This adds to three further measures delaying future commitments: the deferral of VAT, deferral of rates and furloughing of non-working staff.
One of our clients has 20,000 employees and 19,980 were furloughed leaving just 20 in their corporate HQ in London. INTU plc has reported that just 27% of the rent due in March 2020 was received – down from 77% this time last year. The share prices of leading property companies are down by 50% or more depending on their holdings. IWG Plc are down by two thirds.
Research by the Bank of America estimates 11m in the UK have stopped working, with GDP falling for the current quarter by about 34%, similar to the predictions for the French economy. Morgan Stanley has predicted a fall in GDP of 5%. Bloomberg economics has forecast a contraction of 10% in the first six months of the year. No one is talking realistically yet about life in Q3 and Q4.
SBM’s current observations
As an adviser to non-property organisations we get first-hand insights into the health and trends of the economy. The current situation presents opportunities beyond the knee-jerk non-payment of rent.
Increased demand for distribution properties
Property associated with local supply and distribution will continue to be in high demand and may well increase in value. Potentially there could be less demand for big box distribution sheds feeding national markets from a single hub, in favour of smaller regional hubs.
Uncertainty surrounding industrial properties
Vulnerable producers are likely to go to the wall – being replaced by viable producers de-risking (geographically) their supply lines. Changes in this area – uncertainty surrounding who is and who is not viable will create outstanding opportunities to create a property footprint that will take them forward.
No one wants offices. At least for now. Sure enough the novelty of enforced home working will wear off but the new capability and evidence surrounding the productivity of home working staff will cause a permanent displacement from the traditional office.
At SBM we believe the impact of the predicted fall in GDP will lead to a ‘once in a generation’ opportunity to correct and change the relationship between landlord and tenant, with reduced headline rents and much longer rent-frees and other incentives.
Our view runs counter to a recent article penned by British Land’s boss who ‘expects’ his office tenants to pay rent and states everyone he has spoken to ‘can’t wait to get back to the office’.
On behalf of our clients, the customer will become king again. The producers of wealth and income will be more respected. We are working with our clients to engage with all landlords on a case-by-case basis, adopting strategies specific to the type of use and type of property. When government measures are overcome by economic reality, we expect to see a re-setting of the relationship between our clients and their landlords. Our intention is to put in place sustainable property strategies for the wealth creators — the makers and the doers.
Now is the time for clients to use this opportunity to acquire land and buildings to allow them to dramatically shorten their supply chains. Companies and clients are likely to need additional resilience against international unpredictability, leading to the repatriation of out-sourced activity to the UK and Europe.
There will be pain, disorientation and losses for many but out of this for those willing to act – there will be previously denied opportunities.
Stephen Bleakley, SBM Managing Director
From April 2020, SBM has re-focussed and updated its advice to clients in response to Covid-19
Published: 8th April 2020