Monday property news update - 7 June
Office bears, supply chains under pressure and the impending taper of the stamp duty holiday
4 minutes to read
Office bears
Among this week's Economist leader articles is this bearish take on global offices. A few key data points include; the IMF's prediction that a rise in vacancy rates of five percentage points in all commercial property would cause valuations to fall by 15% over five years; Fitch's view that if workers in America do not commute at least three days a week valuations could tumble by over half; and a prediction from Moodys that a fifth of US offices will be empty by 2022.
Distress has historically arisen from over leverage, over supply, under capitalisation of banks and poor sentiment. On these points, LTV’s are low relative to pre-2008, and banks are much better capitalised. Plus, the suggestion that office markets will be deluged with vacant buildings leading to substantial falls in rents and prices ignores the fact that certain office markets are supply constrained from existing planning rules with limited development pipelines - see notes here and here for how London fits into this.
There are some points we do agree on; that "snazzy offices in city centres will remain in demand," and the fact that "they are outnumbered by old and poorly ventilated blocks" presents a problem landlords will grapple with for years. Recent pre-lets in the City of London at high headline rents for space in buildings not yet complete is evidence that occupiers in older buildings are looking to re-locate to better quality space and are willing to pay when their leases expire.
Bifurcation in the performance of the office sector is picking up steam, with prime, sustainable assets in well diversified cities, as well as those primed for innovation outperforming. To what extent will depend not just on new working habits, but on fundamentals that long pre-date the pandemic.
The taper
The stamp duty holiday begins to taper off from the end of this month, with the maximum saving falling from £15,000 to £2,500 until the end of September. Tom Bill weighs up the likely impact on the UK property market.
The number of offers accepted in May reached the highest monthly figure for 10 years and was 55% above the same month in 2019. Transaction volumes will clearly remain high as people attempt to complete before the end of June.
While some will renegotiate the price if the deadline is missed, most will do what they can to complete this month. We can therefore expect a fall in trading in July as more transactions are squeezed through in June. The return of seasonality as more people take a summer holiday means August is also likely to be quiet compared to June.
There remains significant pent up demand in the market which will likely drive a strong recovery in activity after the summer. The number of viewings per available property hit a ten-year high in May (see chart), plus, the number of new prospective buyers registering in the UK between January and May was 40% higher than the same period in 2019.
Supply chains
UK construction output is expanding at its fastest pace since 2014. Order volumes are climbing at their fastest pace since the IHS Markit Construction PMI survey started 24 years ago.
Unsurprisingly, such a strong recovery is placing pressure on supply chains and staffing. Inflation for goods and raw materials is at a 24-year high, compounded by the fact that companies are seeking to build inventories in response to supply shortages. Suppliers' delivery times also lengthened sharply in May, with the downturn in vendor performance the second-steepest since the survey began (exceeded only by that seen in April 2020).
House building is leading rises in activity, followed by commercial work. Despite these pressures, construction companies remain upbeat about their growth prospects for the next 12 months. Around 61% of the survey panel predict a rise in business activity, while just 8% anticipate a decline.
Retail rents
With the moratorium on enforcement action and accrued arrears for commercial tenants due to end at the end of the month, Mark Allan, chief executive of Landsec and Simon Carter, chief executive of British Land, flesh out proposals to end the impasse in today's Times.
The proposal, compiled with the British Property Federation and its members, is built on three principles on which the group says there is broad consensus:
"The first is ring-fencing pre-June 2021 arrears, but lifting the moratorium for rents incurred from June onwards. The second is owners and occupiers using the ring-fence period (we suggest six months) to negotiate and agree how to resolve arrears, using an enhanced code of practice as a guideline, with the ability for payments to be deferred beyond this period where there is agreement between the parties.
"The third and final element is a defined backstop of binding arbitration, to encourage all parties to negotiate constructively and in good faith."
You can read more from the BPF here
In other news...
Writing for React News, Will Matthews unpicks what rising inflation will mean for commercial real estate.
Elsewhere - the ESG talent war, prospects for low-paid workers improve, vaccine success puts Britain on top for foreign investment, China's enduring trade boom, China's cautious consumers, and finally, Yellen says higher US interest rates would be a plus.
Photo by Austin Distel on Unsplash