Q1 2020 commercial property update

The global economy is projected to contract by -3% in 2020.

However, the pandemic fades in the second half of 2020 and the global economy is projected to grow by 5.8% in 2021.

In the UK real GDP could fall by up to 35% in Q2 followed by an immediate and sharp recovery in the second half of the year leaving output 13% lower at the end of 2020.

The recovery is likely to continue into 2021 resulting in an 18% increase in output. However, the latest indications are that a measure of “social distancing” could be required to continue for at least the rest of 2020. This will prolong the recession and delay the eventual recovery. 

Interest rates have been cut from 0.75% to 0.1% and CPI inflation is expected to decline to 1%. 

The pressure on the public finances caused by the need to provide elevated levels of support to businesses, the NHS and the unemployed raises doubts around the government’s ability to pursue increased spending on infrastructure health, policing and education.

The Retail sector benefitted from a relatively benign outcome to the Global Financial Crisis (GFC) but there are very real fears for the future of many retail businesses and the physical assets they support. Logistics is expected to perform better than many other sectors of the economy. But industrial
property occupiers come from across the whole economy. Industrial assets may not be wholly insulated by on-line retailing. 

After heavy falls on the stock market, the FTSE 100 index is now yielding more than the MSCI All Property index. Gilt yields have hardened by 46 bps since the end of Q4 and the current property initial / gilt yield gap has therefore increased to 4.9% more than 1 standard deviation above the 10-year

All Property capital values decreased by -2.7% as Retail capital values fell by -6.3%. Office capital values fell by -1.2% and industrial values decreased by just -0.8%. Rental values decreased -0.3% in Q1. Office and industrial rental value growth, however, remains positive. But rental values for
Shopping Centres, Retail Warehouses and Shops continue to fall. 

Central London office investment volumes were little changed over the whole of Q1. However, the volume of Central London office investments halved in March 2020 compared to March 2019. Residential and Leisure investment volumes declined sharply in March 2020 compared to March 2019, but
industrial and retail activity held up well.

A succession of business failures and a collapse in asset prices could put pressure on banking covenants and ultimately the lenders themselves. Although Land Securities recently put out a statement saying that it could withstand a valuation fall of 62% before LTV covenants were breached.

Cluttons HouseView model indicates that capital values could fall by -13% this year. In such a scenario the total return would be -8% and income return 5%. But there is a very large degree of uncertainty surrounding this central forecast.

One element of risk surrounds income returns. Small retail, food & beverage and leisure operators have been released from their rental obligations. Intu received just 29% of rent due on the March 2020 quarter day. A year earlier the collection figure was 77%. At Land Securities 65% of rents had
been collected 5 days after the quarter compared to 96% in March 2019.


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Jamie McCombe


T +44 (0) 20 7647 7234