The pandemic has had a huge impact on the commercial property market in London. Leisure, retail and hospitality suffered which impacted rents and the demand for space. As offices shut down and people worked from home reduced footfall in the city had a negative effect on surrounding businesses.
There were some winners, however. The surge in online shopping and the rapid requirement for data centres led to extraordinary demand for warehouse space. The second biggest data centre hub in the world, built by Segro, is based just outside Rainham on the eastern edge of London.[1] Technical, media, legal and financial services remained active in London throughout the pandemic.
At a time when many investors are looking outside the capital is this an opportunity for those with a long-term view to snap up commercial property bargains?
There are promising signs of recovery in the capital. In the first three months of 2021, the average rent for new leases on high-quality office space had increased by £7.50 per square foot since the last quarter of 2020.[2]
In addition to this, London is a desirable city in terms of transport links, employment opportunities, culture, leisure and beautiful open spaces, and so it seems likely that it will recover.
Is now a good time to invest in office space in the capital?
People’s working patterns have changed, perhaps for good. A number of large employers have rolled out flexible working arrangements and now have less need for traditional office space. On top of this, the increased importance of reducing carbon emissions has meant offices with low green credentials are now becoming obsolete.
Despite this picture, investors are poised to pour up to £45 billion into London offices as pandemic restrictions ease.[3] That is because office space that prioritizes flexible working patterns and is safe, airy and environmentally friendly will be at a premium. Teams will still need to collaborate and meet face-to-face with each other and clients, but they will want to do so in high-quality office space.
In the second quarter of 2021 enquiries for serviced office spaces and co-working spaces were up 70% on pre-covid levels.[4] Many central London companies now require office space since the demand was put on hold in 2020. In July 2021 Savills recorded the second-highest monthly take up of office space since the first lockdown began in March 2020.[5]
In London, great importance is being placed on creating affordable workspaces that meet our new requirements. In the Mayor of London’s new London Plan, it specifies that workspaces will be needed for sectors that have particular cultural and social value, such as charities, artists and designers, start-up businesses and social enterprises.[6]
Old office space that is no longer fit for purpose is now standing empty in the capital presenting other opportunities for investors. Under the Town and Country Planning (Use Classes) Order 1987 office space can be adapted for other purposes under the same use class (use class E). Other uses include food, financial services, gyms, healthcare, light industry and nurseries.
What is happening in retail?
In the last quarter of 2020 investment in central London retail more than doubled when compared to the final months of 2019. Investment reached £425 million compared to £200 million in 2019.[7] As larger brands left central London property was taken up by smaller, less established brands.
According to Phil Cann, Head of UK Retail Investment at CBRE, this illustrates that there has been a pent-up demand for prime space. Property that is near to major transport links is seeing particular interest, and this is expected to continue.[8]
Retailers who have a strong online presence, as well as a high street store, are continuing to do well. Abby Glennie, co-manager of investment funds Standard Life UK Smaller Companies and Aberdeen Smaller Companies Income, points to retailers such as Dunelm, Halfords and Hotel Chocolate. Customers continue to enjoy visiting these shops and experiencing the products which boosts online sales.[9]
Investors with a long-term view who believe high street shopping in London will thrive once again may be able to benefit from current property valuations.
Why do long leases in the capital attract investors?
In London, the typical commercial lease length is between 10 and 15 years which compares to around 8 years in the rest of the UK. This is also more favourable than residential property where contracts run for between 6 months and a year.
Longer leases provide landlords with a more predictable income stream over time. Since new tenants do not need to be found on a regular basis there is less interruption to income. A tenant with high covenant strength, such as a FTS100 company, will significantly add to the security of a long-term lease.
A commercial lease is normally assignable which means if a tenant’s financial or business circumstances change, they can assign the lease to a new tenant, with the landlord’s permission. The tenant who is leaving will normally have to guarantee the incoming tenant’s obligation to pay the rent and adhere to the terms of the lease. This is a significant advantage for commercial landlords.
With a commercial lease, rents are usually paid months in advance compared to month-by-month rental payments received by residential landlords. Leases are also usually ‘fully repairing and insuring’ which means tenants cover the costs of property maintenance themselves or they pay maintenance costs to the landlord as a service charge. If other costs go up, such as landlords’ insurance, this is passed on to the tenant.
Commercial landlords with long leases have far more protection under the law than residential landlords if a tenant defaults on rent or breaks the contract in some way. To evict a residential tenant a landlord must follow a strict legal process under the Housing Act 1988, whereas a commercial landlord can usually just change the locks if rent is not paid within 28 days. The landlord does not have to give any warning to the tenant.
Why choose Insight Law commercial property lawyers?
Our commercial property lawyers can offer you legal advice tailored to your investment needs. We can assist you with acquiring and selling property, planning and development, financing, lease and management agreements, and matters relating to property litigation.
We act for a variety of different businesses including national and international enterprises, owner-manager businesses and corporations of all sizes. Every transaction is different, and we always go the extra mile to understand our clients’ businesses to maximize the success of their investments.
To speak to our property solicitors about commercial conveyancing, please call us today on 02920 093 600 for a free initial consultation.
[1] Guardian, Warehouses: the latest boom in the UK real estate sector, https://www.theguardian.com/business/2021/aug/12/warehouses-the-latest-boom-in-the-uk-real-estate-sector
[2] Financial Times, The property developers still betting on London offices, https://www.ft.com/content/d6b8d468-e339-497d-b165-0de10bcddcae
[3] Financial Times, The property developers still betting on London offices, https://www.ft.com/content/d6b8d468-e339-497d-b165-0de10bcddcae
[4] Savills, The Savills blog – Real Estate Insights Podcast, 7 July 2021, https://www.savills.co.uk/blog/article/316094/podcasts/real-estate-insights-podcast–have-london-s-commercial-property-markets-now-bounced-back-.aspx
[5] Savills, Market in minutes: UK commercial, 25 August 2021, https://www.savills.com/research_articles/255800/317716-0
[6] Savills, Market in minutes: UK commercial, 25 August 2021, https://www.savills.com/research_articles/255800/317716-0
[7] City A.M. Central London retail investment doubles as fresh brands swoop on empty high street stores, https://www.cityam.com/central-london-retail-investment-doubles-as-fresh-brands-swoop-on-empty-high-street-stores/
[8] CBRE, Flurry of retail investment in Central London sees £475m of transactions complete in A4 2020, https://news.cbre.co.uk/flurry-of-retail-investment-in-central-london-sees-475m-of-transactions-complete-in-q4-2020/
[9]This is Money, Is it time to shop for a high street investment bargain? https://www.thisismoney.co.uk/money/investing/article-9333173/Should-shop-high-street-investment-bargain.html