Our Valuation Advisory Senior Surveyor, Rob Greenwood discusses…
As the UK continues to battle against the Coronavirus outbreak, businesses across the country continue to adapt their working practices in the hope of safeguarding their futures. Whilst the true economic impact of the pandemic will not be felt for some time, there is every chance that this event may leave a lasting mark on the commercial real estate environment.
At the beginning of 2020, it was estimated that 15% of employees throughout the UK regularly worked from home however, with many currently forced to adopt such working practices, only now are employers and employees beginning to see the benefits that such working methods can deliver. Analysts predict that following this pandemic, the number of employees working from home several days a week will treble to c. 45%, which will undeniably impact upon current property market trends, particularly within the office sector.
When “normality” returns, should the number of employees working from home increase, businesses will ultimately require a reduced amount of office space in which to conduct their operations. In turn, this will undoubtedly impact upon office vacancy rates, office take-up rates, demand and headline rental rates commanded across the UK’s towns and cities.
Following this pandemic, it is expected that many businesses will prioritise facilities management in a cost-saving exercise in order to secure their economic futures, and property costs are most often the second largest running cost to a business behind people. Whilst the size of a warehouse or a shop will remain pivotal to business operations within the industrial and retail sectors, technological advancements are currently illustrating that individuals being present in an office is not business critical. As a result of the “forced” working from home scenario being implemented by the UK authorities at present, real estate could be the first major cost-saving opportunity identified in the short-medium term.
Whilst businesses will always seek to occupy office space to centralise their operations within in a region, the space they take-up will likely be reduced in the future, with hot-desking becoming the “norm” for many employers. With a fall in demand, will come an increase in vacancy rates and markets are ultimately driven by occupation.
Conversely, whilst businesses may require a reduced overall footprint, we may see a shift from businesses “owner occupying” their premises to a more lease-driven market, which would create extra flexibility for businesses and enable them to hold more control over the operating costs. This scenario may well see a positive impact upon the value of office investment assets, with additional market participants driving positive occupier demand and rental growth, ultimately generating a hardening of investment yields.
Some critics suggest that this pandemic may even drive a complete overhaul of the property industry with a move away from traditional rental models. With many businesses likely to be in an economic position of weakness when “normal” operations resume, some analysts consider that landlords may be willing to accept rent payable on a profit share basis. Profit rents are utilised on units within Retail and Leisure Parks to a degree, but this ‘Profit Rent’ usually provides for a small percentage of the rental income ontop of a base rent. Whilst more prevalent and substantial profit rent agreements may take place in isolated instances, such concepts are unlikely to become the benchmark for occupying premises and in any case, a scenario of this nature is most likely to be applicable to the retail industry, whereby challenges were being experienced long before the Covid-19 pandemic.
The above scenario also poses question marks as to how property will be accounted for and valued were such a model ever adopted? For example, would a Lender be prepared to lend against an asset let on a profit share basis given there is no guarantee of income to a Landlord?
Question marks also remain as to how real estate will be included in the contingency plans of businesses should a global pandemic on this scale ever be experienced again?
There remains a great degree of uncertainty as to where the property market will emerge following this pandemic however, one certainty is that businesses will need to manage their assets more effectively moving forward. Parkinson Real Estate provide a host of services which can assist with such forward thinking strategies to reduce costs and add value ranging from Property & Occupational Management services to Acquisition and Disposal.
Rob Greenwood MSc MRICS
RICS Registered Valuer
Senior Surveyor – Valuation Advisory