The coronavirus has had a big impact on markets around the world, but the longer-lasting effects have yet to be realised.
We have seen people’s day-to-day lives change, from stock-piling essential goods to working from home. Technology has enabled these things to happen, things like home delivery and conferencing call facilities.
One of the knock-on effects of the coronavirus could likely be that these technology-enabled activities become a lasting change for millions of people (adopted by the masses far quicker than anyone ever predicted).
In property, this could be game-changing. E-commerce penetration in the UK is not a new thing with around 20% of all retail sales being made online. The grocery side of the retail market, however, has so far been less impacted by e-commerce, with 5.3% of orders made online in the UK in January 2020 according to the Office for National Statistics (ONS).
However, over the past few weeks Ocado and all supermarkets have seen a huge spike in demand for home delivery. Being forced into using home delivery for groceries, consumer behaviour could quite easily be changed for good.
The impact this would have on supermarkets could be big. Making home deliveries is expensive and none of the grocers make money from it. The infrastructure is there to serve this demand – supermarket stores will continue to be used to supply the goods. But the costly business of employing more staff to pick the products and a fleet of vans and drivers to deliver it will eat into margins.
The office sector could also be affected in the long run. The way people work has been changing for a while, with the rise of flexible, co-working being prominent today.
With millions of people now working from home for a significant period of time due to covid-19, you can see a lot of companies adopting this way of working going forward if all the technology infrastructure runs smoothly and productivity isn’t hit.
Perhaps not the whole workforce working from home all of the time, but some for some of the time.
This has been happening in many large corporate companies already, with the implementation of hot-desking and encouraging working from home at least one-day a week. This has reduced the amount of office space it needs and, ultimately, reduced the amount of rent it pays.
The coronavirus could speed up this process for many more companies. The likely impact is demand for office space would drop. We’re not saying companies are going to ditch their head office, but they could slash the space they need.
For example, instead of having a requirement for a 100,000 square foot office, it may only be 80,000 square foot or 90,000 square foot.
Luckily for most of the listed property companies that focus on offices, supply of office space in the UK is at historic lows. In London the amount of office space available to let is 4.8%, according to consultancy Savills, and even less still for grade A space (the best spec).
It is a similar story in regional cities, with the big six – Manchester, Birmingham, Leeds, Bristol, Glasgow and Edinburgh – having vacancy rates of just 4.2%, according to JLL.
What’s the likely impact on serviced offices? The growing office sub-sector has thrived in recent years on small and medium sized companies (SMEs) renting ‘plug-and-play’ space. These companies rely on serviced offices for the infrastructure (such as super-fast broadband and telephone facilities) to carry out their business. It could be that a lot of SMEs don’t make it through this period without this vital (and costly) infrastructure.
To try to see themselves through, rent holidays will become a commonplace demand from businesses. In the retail, food & beverage and leisure sectors, companies have already asked for a hiatus on paying rents to help them through this period. This is likely to cascade into other sectors.
Some businesses and business sectors are simply not able to operate remotely and therefore are likely to shut-down operations for a period of time. They will face difficult decisions on prioritising bills. Rent due on an office or industrial warehouse that isn’t being used is likely to be bottom of that list.
This will have a huge impact on landlords. Listed companies, such as NewRiver REIT (which owns shopping centres, retail parks, convenience stores and pubs), have already taken the decision to suspend dividend payments to shareholders to preserve cash. This course of action is sure to become commonplace, mainly because no-one knows how long this will last.
Property companies from all sectors will also be nervously looking at the creditworthiness of their tenants and making assumptions on their future ability to pay rent or even their future existence. Difficult conversations are going to have to be had with banks and lenders regarding holidays of their own.
We are in unchartered territory, making any forward-looking statement impossible. Property companies’ first priorities will be seeing out this difficult time in damage limitation mode. However, lasting changes to how people live, work and play will have a huge impact on the future of real estate. They should be monitoring the trends very carefully and looking to adapt.
Here at QuotedData we are watching developments closely and will update you as things change.