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How will the Commercial Property Market perform post Lockdown?

Global Recession

2008 witnessed the collapse of both the residential and commercial property sectors in the UK as the world financial markets reacted to the failure of Lehman Bros and the global financial market collapse that ensued.  No property sector remained unscathed. The withdrawal of commercial finance; restricted mortgage products; enhanced investor uncertainty and importantly a slow response by the UK government to safeguard the economy collectively plunged the property market into a four-year slump.  As property values fell and businesses breached their banking covenants, what once appeared prudent bank borrowing by business became the commercial noose that eventually brought the demise of multiple businesses leaving no sector untouched. This fall varied by sector, the office market taking the largest hit with values in certain locations recording falls in excess of 60%. However, during this period, it appears the shortage of arm’s length transactions served to artificially prop up the market. It wasn’t until the Bank of England forced lenders to crystallise their losses in 2011/12 that sufficient evidence was created to fully understand the true impact the global financial crisis had on the property market.

Eight years on the property market was faring well, riding on the back of a relatively stable low interest and inflation rate economy, although remained arguably subdued due to the threats brought by Brexit.  Property finance was readily available with challenger banks and private equity lenders populating sectors of the lending market where the more risk adverse high street banks had not re-entered after the global financial crisis. This allowed all sectors of the economy to readily access finance. Unemployment was also running below 4%, a further sign the economy was in a healthy state. This was all abruptly interrupted by the coronavirus pandemic and subsequent imposed lockdown.

Three weeks into lockdown current economic modelling prepared by the Office of Budget Responsibility is suggesting the UK economy may contract by 12.8% in 2020. Unemployment is predicted to rise to 10% within three months before falling back to 7.3% by the turn of the year, this percentage remaining 3.4% higher than January 2020 with full recovery not expected until 2023. These figures are significant and will have an undoubted lasting impact on the economy. An estimated 1.0m businesses are expected to fail. Where does this leave the commercial property market and can we look back at 2008-12 to understand how the property market might recover?

What is certain is the headwinds facing the market are now very similar to that of 2008-12. Once again investors are facing uncertainty; expected longer marketing voids; increased tenant incentive packages; high holding costs and downward pressure on rents. Therefore, will the market draw on history and immediately devalue property back to 2012 levels based on lessons learned or once again go into a state of semi-hibernation for 12-18 months hiding behind limited transactions in the hope that the market corrects sufficiently to protect businesses from breaching their banking covenants.

Although many similarities exist, there are some fundamental differences which brings some optimism in these unprecedented times.  This time around banks are well capitalised and are open to support business. There has been swift government intervention to provide financial support which is expected to continue and the Bank of England standby waiting to introduce financial stimuli to support the economy when necessary. 

If the lockdown is lifted and most business can resume trading within two months, I expect the property market to recover reasonably quickly with no more than a few skint knees. However, if this date is missed, there is a very real risk fractures in the market will appear leading to a longer recovery and more challenging times for the industry. Only time will play out the true impact this pandemic has had on the property market, but I hope, as I’m sure we all do, current interventions will be sufficient to allow business to resume shortly. 

About the author

Gregor is a qualified Chartered Surveyor and Registered Valuer specialising in the commercial property sector. He is a Director in Allied Surveyors Scotland plc based in their Glasgow office and with over 20 years experience, his advice is regularly sought by Lending Institutions, Pension Trustees, SME’s and Investors.

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