Want to keep up to date? Click here to learn the benefits of signing up to Business Hub

Property Monthly

This article is part of our collection on Property Monthly

Real estate commercial bulletin – July 2020

Tom Sharman, head of strategy and insight, Real Estate Finance, comments on the latest developments in the commercial property market.

Last updated: 11 Aug 2020 4 min read

Share This

Regent Street, London, during lockdown. The fall in retail values has dramatically accelerated.

The virus may have peaked, but the fallout is only just beginning

At the time of writing, despite a few localised outbreaks, the level of infection in the UK and most of Europe is a fraction of the peak seen in spring. In most regions, shops and restaurants have reopened and lives for many people have returned to at least some semblance of normality. 

However, the full impact on the economy is yet to be understood. At the last count, 9.6 million people were still on the government furlough scheme, and we know that some of these people will never return to their previous roles, with significant job losses already announced in the retail and leisure sectors. We have little concept as to where these numbers will eventually end up, but many economic forecasters have predicted that the unemployment rate will more than double from the current low level of under 4%. A loss of jobs on this scale would exceed anything experienced during the global financial crisis, and unemployment would reach a level unseen since the recession of the early 1990s. Those previous recessions coincided with a fall in commercial real estate values of 30% to 40%.

Of course, every recession is unique, triggered by specific events and focused on different parts of the economy. The crashes in 1990 and 2007 came at the end of sustained booms in values and construction, neither of which have occurred to the same extent over the current cycle. But there are aspects of the situation today that are virtually unprecedented, such as the total shuttering of some sectors of the economy, and dramatic ongoing structural changes in retail. So far, the effect on the commercial real estate market has been to drain liquidity from the investment market and to dramatically accelerate the already well-established downward trend in retail values. 

The retail sector is undoubtedly the most directly exposed, but other parts of the market will inevitably feel the impact of the retrenchment that is sweeping through that sector

On the other hand, the impact on office, industrial and residential values has so far been little more than a token recognition by valuers that the backdrop has changed. Data from the likes of MSCI, CBRE, Halifax and Nationwide suggest that values across these sectors have perhaps fallen by 3% or 4%. Yet it seems inconceivable that a global economic shock of this scale could have such a marginal effect on real estate values.

Looking forward

The retail sector is undoubtedly the most directly exposed, with many forecasters predicting very significant ongoing value loss, yet other parts of the market will inevitably feel the impact of the retrenchment that is sweeping through that sector. Contraction by retailers, casual dining chains, hotels and airlines will directly impact on a huge range of suppliers and reduce the disposable income of the many thousands who lose their jobs. This fallout will have secondary impacts on residential, office and industrial markets. 

The residential sector will surely see lower levels of transactional activity given the expected scale of job losses, and such rises in unemployment have always in the past coincided with a material fall in values. However, the relatively conservative lending that has characterised the mortgage market for the last decade gives some comfort that levels of distress should be far lower than were seen in the early ’90s and at the end of the following decade. The strength of bank balance sheets should also ensure that the mortgage market remains liquid and reduce the risk of financial sector contagion.

The office market will take some direct hits from those sectors of the economy that are contracting, and there are some harder to quantify risks around changing working practices; but the limited development, conservative leverage and moderate growth of recent years suggests that values will deflate rather than collapse. The multi-let industrial sector will see rising business failures, a flattening of the runaway rental growth of recent years and a softening of yields as a result. The logistics sector, meanwhile, is probably more immediately at risk of a new bubble than a burst one.

Things seem certain to get worse before they get better, but there are reasons to feel confident that the real estate sector (outside of retail, at least) will not suffer the devastating losses seen in other major recessions.

Share This

Property Monthly, Real Estate

Disclaimer - This document has been prepared by National Westminster Bank Plc or an affiliated entity (“NatWest”) exclusively for internal consideration by the recipient (the “Recipient” or “you”) for information purposes only. This document is incomplete without reference to, and should be viewed solely in conjunction with, any oral briefing provided by NatWest. NatWest and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interests may include dealing in, trading, holding or acting as market-maker in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. NatWest is not and shall not be obliged to update or correct any information contained in this document. This document is provided for discussion purposes only and its content should not be treated as advice of any kind. This document does not constitute an offer or invitation to enter into any engagement or transaction or an offer or invitation for the sale, purchase, exchange or transfer of any securities or a recommendation to enter into any transaction, and is not intended to form the basis of any investment decision. This material does not take into account the particular investment objectives, financial conditions, or needs of individual clients. NatWest will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest for investment advice or recommendations of any sort. Neither this document nor our analyses are, nor purport to be, appraisals or valuations of the assets, securities or business(es) of the Recipient or any transaction counterparty. NatWest makes no representation, warranty, undertaking or assurance of any kind (express or implied) with respect to the adequacy, accuracy, completeness or reasonableness of this document, and disclaims all liability for any use you, your affiliates, connected companies, employees, or your advisers make of it.  Any views expressed in this document (including statements or forecasts) constitute the judgment of NatWest as of the date given and are subject to change without notice.  NatWest does not undertake to update this document or determine the accuracy or reasonableness of information or assumptions contained herein. NatWest accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However, this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed. The information in this document is confidential and proprietary to NatWest and is intended for use only by you and should not be reproduced, distributed or disclosed (in whole or in part) to any other person without our prior written consent.  National Westminster Bank Plc.  Registered in England & Wales No. 929027.  Registered Office: 250 Bishopsgate, London EC2M 4AA.  National Westminster Bank Plc is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.