Henley based law firm THP Solicitors have polled over 100 commercial property surveyors and agents in Thames Valley to get their insights into current trends in the local market.
“Our survey showed that commercial property professionals feel the decline in high street shopping/rise in e-commerce and shift in social behaviour to working from home were the two biggest influential factors on the commercial property market in the Thames Valley in the next 5 years”, said Frances Watts, Head of Commercial Property at THP Solicitors.
She continued, “With footfall across high streets and shopping centres decreasing year on year for the best part of a decade, even before the pandemic, and e-retail increasing dramatically in turn, this is no great surprise. Whilst some retailers will always feel a physical space is a synonymous part of their marketing strategy, and those with personal service-based businesses have no other option, poor performing outlets will be under threat and landlords of retail space may need to consider their options, with many looking to convert to residential.
With flexible working becoming the norm and the need to be physically present in your place of work no longer a priority, a mass exodus of people from the cities to the more comfortable suburbs is underway. The proportion of buyers within London postcodes registering with estate agencies outside of the capital has reportedly almost doubled, which is great news for the Thames Valley, with larger properties, where working from home options are more comfortable and commute time is less of a factor, fuelling the demand.”
Industrial distribution/logistic units were by far the most popular with 75% of the survey votes, closely followed by industrial units for manufacturing, when asked based on both enquiries received and their ‘gut feel’ of the market, which property types were currently in most demand. Next came flexi-space/ serviced office and out of town/provincial office space. Retail units, both in town centre and out of town locations, together with pubs/hospitality venue were unsurprisingly in the least demand. This trend has also been reflected in the transactions THP Solicitors are retained on, and a number of their manufacturing clients are looking to increase their industrial space to absorb the growing demands of their businesses.
Tenant activity in general
With many tenants are struggling to pay their rent, THP Solicitors asked what types of terms they might be seeking from their landlords. The most popular demand, 64%, was rent payments on a monthly basis rather than a quarterly basis, allowing tenants to manage their cash flow more effectively. To date all clients at THP Solicitors have accepted these requests from tenants and are conscious that any decision as a landlord at the moment needs to avoid a tenants insolvency, leaving the landlord with no rent, difficulty in securing a new tenant at a similar rent and possibly even a liability to pay rates on the empty property. Shorter terms and rent reduction were the next most popular options along with more tenant-friendly break clauses.
Interestingly, the survey indicates that there has been very little movement between tenants and landlords to instigate direct discussions on which to base negotiations. This hesitancy by both landlords and tenants to communicate won’t help either weather the storm and just kicks the issue down the road. At THP Solicitors are helping many clients start these conversations and act as a third party in exploring the options. However, whilst they would encourage discussions, both sides should resist the temptation to reach an informal agreement as that may result in unintended consequences. Their advice is that any agreement to vary the existing terms should be very carefully considered and concessions, time limits, interest payments and mechanisms for ending the agreement documented.
Property owner activity
The survey participants were asked what their property owner/investor clients were considering in terms of activity. 45% were enquiring about converting commercial space to residential and an equal number were enquiring about selling off all/part of their property portfolio and/or passing their property business/management onto family/others. This re-invention of commercial portfolios to residential can be challenging as the scale isn’t always attractive for investors, especially retail to residential. However, with an ever-increasing population and national shortage of housing stock, residential demand should be self-fulfilling so potentially a less risky investment. Permitted Development Rights, originally introduced by the government in 2013, allow offices to be converted to residential use and has led to a significant amount of conversion activity, even pre-pandemic. Many of THP Solicitor’s portfolio clients are carrying out strategic reviews of their property stock in consideration of the change in risk of some of their tenants and impact the pandemic has had on the retail and office sectors in particulars, with lease re-gears or other asset management implementation a common way forward.
Unsurprisingly, with the majority of office-based workers currently working from home, 63% of agents had seen a decrease in new enquiries for rented office space both in town centres and more provincial locations. Where there were new enquiries, these were centred around serviced office/flexible workspaces (30%) or the ability to demand more flexible lease terms. Flexible working will undoubtedly be one of the legacies of the pandemic. It will have made many occupiers evaluate their office requirements and reflect on how much of the traditional workspace space they need to run their businesses.
Whilst for many ‘home working’ maybe be losing some of its charm after numerous lockdowns, a hybrid of home/ office agile working is expected, and landlords and office space operators will have to be equally flexible in their offerings to remain relevant. Social distancing, staggered shifts/ work bubbles, a non-reliance on public transport to gain access etc will all play a part whilst the immediate effects of the pandemic remain the shift to home looks set to stay as our habits change permanently.
THP Solicitors asked if the survey participants had seen any trends emerging in the industrial sector and over 66% had seen an increased demand for rented industrial premises and 50% increased demand for industrial units to purchase. This they felt was reflected in the value of industrial units on the market with over 40% seeing an inflation in prices. The industrial and logistics sector has been on a great run over the past few years fuelled by many factors including the UK government encouraging manufacturing and the need for storage/warehousing and logistics space to support the e-commerce sectors. This trend doesn’t look like reversing anytime soon.
Regional distribution centres that serve not only the shops but smaller logistics hubs close to major towns and cities, which in turn serve home deliveries, are in high demand. Multi-let industrial estates benefit from the stability the diversity of their tenants bring, as they often span a number of industries and business types. The increased demand for industrial units, especially those that are small/medium sized, may result in rents increasing as demand for space exceeds supply following the end of lockdown. The transactions the commercial property team at THP Solicitors are handling include taking increased space for manufacturing clients and also an appetite amongst investor clients to look to acquire industrial sites in the South East to increase their portfolios.
THP Solicitors asked their survey participants what were the most common enquiries from their clients who were tenants of retail spaces. By far, enquiries relating to exercising break clauses and/or regearing leases were the most common with 50% of the vote. Next came enquiries regarding early termination for tenants who cannot see a sustainable future. Interestingly there were very few enquiries regarding the option of a turnover based rent, but this may be due to tenants not realising this could be an option and/or landlords not wishing to share more economic risk. Some investors will be looking to offload their retail investments and rents and capital values are expected to continue to fall across the sector, especially in expensive prime locations, as more retailers focus on their online offerings.
THP Solicitors are also seeing a clear trend of retail units being re-let as food and drink orientated businesses and the application of the new use class E has assisted in this. But whilst you would have to be bullish not to expect the vacancy rate trend to continue as the impact of the pandemic is worked through, hopefully it’s not all doom for the retail sector. A reduction in office commuting, change in shopping habits, and increased attraction of independent traders, if sustained, may see retail reinvent itself in the suburban shopping parades/ retail centres as spend is reallocated locally. However, these retailers will be at the smaller end, wanting secondary units and they are likely to demand shorter retail leases with more frequent break intervals. Landlords may also favour letting to tenants in ‘essential retail’ such as convenience stores, takeaways, and pharmacies.
In good news for the property sector, only 20% of those surveyed reported instances of developers looking to defer land purchases until more clarity emerges in the market and/or deferring payments based on development or planning achieved. The overwhelming trend (70%) was in developers looking to purchase commercial sites to convert to residential with 60% being asked to look for land to acquire opportunistically. That being said, 40% reported that developers were looking to take options rather than purchase sites. There were no reports of any developers looking to develop non-residential building projects.
Based on this investor and development activity, those who responded to the survey felt the top 3 influencing factors for development projects in the Thames Valley would be the trend of people moving out of London into commuter belts such as the Thames Valley (90%), followed by the relaxation of planning laws (64%) and finally government incentives to stimulate the demand for residential developments such as the e.g. mortgage guarantee scheme. THP Solicitors have a strong working relationship with a number of active developers in the Thames Valley and all have been actively seeking developments during the pandemic. They have acted on a significant rise in both conditional and unconditional purchases as well as options as the thirst for development continues despite some of the other challenges to commercial real estate as a whole.