UK Commercial property market is still feeling the effects of Covid
According to the leading property intelligence platform Nimbus®, the impact of COVID-19 is still being felt on UK high streets four years on from the first lockdowns.
There are still ongoing implications for retail real estate, but with these challenges come opportunities, says Nimbus®. Post-Covid, businesses have had to adapt and change the profile of retail footprints, with many taking smaller units in town centres, and larger ones in out-of-town retail parks. For those that haven’t changed their offering, there has been a raft of closures and administrations – with Wilko and The Body Shop being two of the biggest names of late.
Nimbus’ “Retail – State of the Market Update” report – which is the result of collaborative efforts with a range of property and retail experts – casts a spotlight on the changes happening across a rapidly-evolving landscape. This includes how the introduction of Class E* has allowed uses to move back into the high street that had otherwise been driven out by national retailers paying higher rents on strong covenants.
Paul Davis, (main picture) co-founder at Nimbus®, says:
“There are a number of areas in the market – like food retail – that continue to boom. In the case of drive thrus and roadside retail, we have seen strong competition for sites, that has also driven land values up to record levels.
“Naturally, the evolving market means that not every impact or route forward for the retail estate market is completely clear cut, but there certainly are opportunities.
“Class E’s introduction is returning uses historically removed from the high street – like doctors, dentists, and nurseries – and creating the opportunity for town centres to become more community-focused once again. Meanwhile, there is also opportunity in the right places for the right buildings to see elements – usually uppers – repurposed into residential where it is viable.”
Nimbus’ report details an increase in councils looking to create mixed-use developments in their own high streets, where in some cases local councils have acquired their local centres and are progressing schemes through joint ventures with the private sector, which creates the question of what order various elements should come forward and how this impacts overall values.
Paul Davis added:
“It’s a case of what comes first, the chicken or the egg? Residential needs the buzz of retail and leisure operators to sell well, but those operators need the residential occupiers to drive viable trade – so there remains a balance to be found and in some cases this issue is being resolved by councils taking a long term view on their local high streets.
“There has also been a renaissance in local shopping, which along with the “right sizing” of retail areas, re-basing of rents and consumer demand to ‘shop local’ is positioning independent retailers as the main tenant demand. In turn, this is seeing a change in how landlords are approaching buildings and units to rent, putting in more spec and providing an element of fit-out to entice independents in, which typically want to be in and trading as quickly as possible.”
The “Retail – State of the Market Update” report includes input from property and retail experts from Avison Young, FHP, GCW, Lambert Smith Hampton, Siddall Jones and DWF, and is available to download here: https://www.nimbusmaps.co.uk/report-retail-market
Meanwhile, research from the Bayes Business School New City, University of London, indicates that lending for UK commercial real estate fell last year to lowest level in a decade. The Bayes bi-annual real estate report shows significant year-on-year decline in new lending.
Ongoing stress in the UK commercial real estate market is unlikely to recede soon as the Bayes report shows that around 42 percent of £170 billion of loans outstanding for UK commercial property will come up for refinancing within 12 months.
According to Dr. Lux of Bays, new lending at £32 billion was last year at its lowest level since 2013, while the total level of outstanding debt at £170 billion touched its lowest level since 2017.
Dr Lux added that the fall in outstanding debt is probably due to repaid debt not being replaced with new loans at the same pace as before. He blames valuation uncertainties and discrepancies in debt transactions as the reasons for low overall transaction volumes in the real estate equity markets.
Dr Lux said:
“The UK lending market is becoming more binary, with borrowers sourcing their debt either from UK banks or from debt funds. European banks are finding it increasingly difficult to provide funding due to ECB regulations and implementation of Basel IV rules’ as well as unfavourable currency movements between sterling and euro funding costs.
“The share of international banks actively lending to commercial real estate in the UK market has been falling since 2018. Historically, these banks provided 32–34% of financing, but their share dropped to an historical low of 25 per cent last year.”
A more optimistic note was struck by Chris Gow, CBRE’s Head of Finance and Structured Debt (Europe), when he says:
"2023 was a year when lenders sought to prioritise the identification of the nature and scale of their problem loans over new loan origination. This process is now largely complete and we have seen a strong recovery in lender liquidity so far in 2024. Competition is strongest for investment loans in all asset classes and for developments in the most favoured Living, Hospitality and Data Centre sectors with pricing, leverage and covenants all becoming more borrower-friendly.
“Some lenders are more assertively protecting their positions on defaulted loans. While enforcement rates are increasing, they remain very low overall. Combined with Amend & Extend Strategies deployed by many lenders, we believe the bulk of short term maturities will be solved over a period in excess of 12 months."
Ben Thomason, head of UK and EMEA Debt Advisory at Colliers says:
"The findings in the Bayes report highlight just how much the real estate market has been impacted by rising rates and the impact on servicing, which resulted in exceptionally low transaction volumes last year.
"In the interim we've seen ever more debt funds being launched which are able to move quickly, provide greater flexibility, and are able to take a view on ICRs and overall covenant packages. However, we are expecting the wheels to start turning again towards the middle of this year as interest rates and inflation starts to fall.
“We are already seeing margins contract to well below 200bps for strong propositions with lower ICR requirements from a number of the main UK banks. At the same time confidence is returning to the market from investors as pricing expectations have settled following a period of readjustment over the last year."
Nick Harris, Head of UK and Cross Border Valuation at Savills, says:
“The higher underlying cost of money in 2023 curtailed the viability of many commercial property transactions. Values in most sectors fell and the availability of stock to the market became restricted which resulted in a decline in new loan origination in comparison with 12 months previously.
“The latest Bayes report also shows that lenders increasingly became inward focused, seeking to refinance their loans, which accounted for 42% of their total lending. Although loan breaches have increased, lenders have generally been supportive of their customer base, especially where there is debt interest cover. Loan extensions or restructuring were the preferred options, rather than enforcing sales into a weaker market.”
*Use Class E allows for many different uses and unless a planning restriction exists can be utilised for a range of alternative uses without consultation with the local authority. This can be chopped and changed at will. However, external changes to a Use Class E building may require planning permission. Licensing may also be required in order to operate.
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