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The value of commercial real estate in the U.K. is under threat, as employees become more accustomed to working from home amid the outbreak of coronavirus.
Companies are reviewing their property requirements and may need less office space, which could hit prices and have a knock-on effect for Britain’s pension funds — many hold sizable chunks of real estate.
“Arguably, the market is already anticipating a repricing in assets given the net asset value discounts on the office landlords,” warned one commercial real-estate analyst at stockbroker Peel Hunt.
Matthew Saperia told MarketWatch coronavirus will shorten leases and tenants will demand more flexibility.
“Some of our clients will say, look what happened in retail 10 years ago when the internet started to become more popular. That was the canary in the coal mine. Fast-forward 10 years and look where we are, COVID-19 is the same canary for the office market,” he said.
Various property funds are heavily exposed to offices. Kames’ £442 million U.K. Property Income fund has more than half of its assets allocated to office property. Likewise, the smaller £411 million Aviva U.K. Property Fund has its largest holding in office property — just over 35% of the portfolio.
The M&G Property Portfolio, which has been suspended since December, has its top holding in office property — just over 29% of the fund. Others including M&G Property Portfolio, Janus Henderson Property and Standard Life Investments Real Estate all invest in offices.
Up to half the U.K. workforce could work remotely when coronavirus lockdowns end, according to a report commissioned by Instant Offices, the world’s largest flexible office-space broker. It also said 70% of finance directors are planning to move part of their on-site workforce into remote roles after coronavirus, to cut costs.
John Duckworth, managing director U.K. & EMEA of Instant Offices, told MarketWatch: “The greatest social working experiment ever is just about to be completed, and it has kind of worked. There is a choice fundamentally for people to work across a spectrum which before didn’t exist.”
“I think anyone looking to sign a long-term lease or holding a long-term lease is going to be very concerned about the liability of what that represents,” he said, adding that companies will move to hub-and-spoke models, where corporate headquarters are supported by smaller offices around London and other regions of the U.K.
The trends were in place before coronavirus, he said, but it has forced companies to consider ways to incorporate home working and smaller, dispersed, flexible spaces, into the mix of leasing space.
Meanwhile, in the U.S., investment bank Morgan Stanley expects 30% of people to work from home for the long term, according to a recent research note.
One example of a company looking to scale back its use of office space is Savant Recruitment Experts, a boutique finance headhunting firm based in London and Reading,
Mark Sheldon, managing director at Savant, said that the firm had been planning to sign a new lease right before the coronavirus pandemic struck, but those plans were put on hold now staff are used to working remotely.
The firm’s 12 London-based staff are unlikely to go back to a full-time office set up, although Savant may still need a boardroom or flexible space in future for face-to-face meetings, Sheldon said.
“Many businesses were one or the other before — either fully flexible or all in the office. I think there will be much more of a hybrid in the future,” Sheldon said.
He said he expects the firm will reduce its overall property cost by between 40% and 50%.
But Mike Wiseman, head of office leasing at property investment firm British Land, told MarketWatch: “There is a strong future for the office, the work-from-home experiment has worked, but it’s not a long-term solution.”
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He said companies will maintain work-from-home as an extension to the workplace but will continue to invest in offices to attract and retain employees and boost productivity.
“The more progressive businesses have made that link between corporate and real estate strategy,” he said.
This has led to a divergence between demand for best-in-class office spaces, and what he calls “vanilla” offerings, for whom he said coronavirus will be a “huge wake up call.”
Wiseman said coronavirus will cause companies to rethink office spaces entirely, from how much space they need in certain locations, to how they can boost collaboration and manage company culture.
