Market Essay. London – Getting back to business

Greg Mansell, head of UK research and insight, Cushman & Wakefield takes a look at an unprecedented time for London and its markets

At the end of March, the London property market bore no resemblance to a few months earlier, with its empty streets and closed businesses symbolic of London under lockdown.

‘The market was struggling to function even before the lockdown began’

In truth, the market was struggling to function even before the lockdown began. International buyers were already reluctant to travel, and occupiers were unsure whether it was the right time to launch a new search for space. Many construction companies stopped work on site when lockdown began, slamming the brakes on to the nine million square feet of office space due to complete this year in central London, with around two-thirds pre-let or under offer. Some construction companies have since re-opened sites to avoid further delays. However, occupiers due to move into a new property have a nervous wait to see if they need to find temporary space or extend their current lease, if that’s possible, until their new space is available. As well as these practical issues, this quarter raised new financial problems. Tenants became reticent to pay their rent while cashflows were so uncertain. Rent collection rates were down by 20-25 per cent on normal expectations at seven working days after quarter end, but have since risen and will continue to rise as landlords and tenants find the right balance between short-term obligations and long-term stability.

Occupiers looking for new space were highly active in the first months of the year, but by March it had become difficult for lease deals to progress, with leasing volumes 20 per cent below average for office space in London at the end of the first quarter. But the amount of space under offer was 28 per cent above average, as most ongoing talks spilled over into the second quarter. The main concern is that new enquiries for office space have become increasingly rare since lockdown began.

London’s pipeline of investment deals suffered from postponements, but over £4bn of transactions had completed before the quarter ended, most of which were for offices.

However, the lack of new properties coming to market suggests the second quarter will be very quiet for investment activity. MSCI indices showed capital values fell in all sectors in March. Offices in the City of London were most resilient, with a 0.2 per cent month-on-month decline, while UK shopping centres suffered the largest fall: a 6.6 per cent decline.

The next challenge affects us all: how do we safely return to work once lockdown ends? On 27 April, Prime Minister Boris Johnson said the government will “refine economic and social restrictions” to reopen parts of the economy. Much of our focus in the second quarter will be on preparing business recovery plans. Property managers will need to clean and inspect their buildings, businesses will have to create new return-to-work policies, and offices will devise new layouts that ensure social distancing. London’s streets will not be empty for long, nor will its businesses stay shut. Deal activity might be quiet in the second quarter, but the property industry will be undertaking a huge amount of work to get London up and running again.

This market essay first appeared in NLQ Issue 43, published July 2020