UK Real Estate market update

This note sets out Fiera Real Estate’s observations on the economic impact of Covid-19, specifically with regards to the UK commercial real estate markets. It is based on Fiera Real Estate’s UK portfolio, which constitutes:

• £574.6m of standing investments, comprising 4.5m sq ft;
• 337,000 sq ft of proposed commercial developments, with a GDV of c.132m; and
• A pipeline of 2,270 residential units, with and end value c.£305m.


The first confirmed case of Covid-19 was in November 2019 in China, with the first recorded case in the UK identified in February 2020.

In response to the outbreak of the virus, there has been a cohesive fiscal and monetary response from governments and central banks across the world. In the UK, the Government and Bank of England having announced, amongst other economic measures:

• A £330bn loan guarantee scheme for companies;
• A suspension of business rate (taxes on tenants in a property);
• Suspension of enforcement for default on rental payments;
• Grants for the payment of employees’ wages and incomes for the self employed; and
• A reduction in central bank base rate by 65 bps, to 0.1%.

There are significant economic implications which emanate from the outbreak of Covid-19. Capital Economics, a research consultancy, estimate UK GDP will fall by approximately 15% in Q2 and unemployment will increase from 4% to 6% over the course of the calendar year. Forecast negative GDP growth and rising unemployment are principally a function of government mandated ‘social distancing’.

Whilst fiscal and monetary support has been significant, most asset markets have still suffered precipitous losses over the last four weeks. Investors have been concerned by uncertainty around the duration and depth of the outbreak, and the consequences for economic activity. In UK commercial real estate markets, the most tangible metric at present is the FTSE 350 REIT Index, which has fallen by c.20% since 1-February driven by concerns about payments of rent and the knock-on effect of REIT’s ability to service bank interest and make shareholder dividends.

Occupational Markets


Retail revenue outside a few key sectors has been hugely impacted by the closure of shops announced on 23-March. Global Retail, a consultancy firm, forecast non-food spend will drop by 8.9% this year, which would be worse than the financial crisis. A select few subsectors of the retail market – food, pharmacies – are, however, bucking the trend.

Whilst the UK government has introduced emergency measures to support retailers, including the suspension of property taxes, revenue declines across non-food retailers are likely to act as a catalyst for insolvency events for businesses that are already struggling. Increased tenant insolvencies are likely to flow through to vacancies, and ultimately put downward pressure on rental values of retail real estate.

As at the end of the quarter day week (27-March), Fiera Real Estate had received 72% of quarterly rent and service charge due from the UK retail assets it manages. Whilst this compares favourably with the likes of Intu, which received 29% of rent due, it remains a cause for concern. Retailers with rents outstanding included B&M Bargains, Go Outdoors (part of JD Sports), Sports Direct, and Matalan.


Operators of hotels, restaurants, gyms, cinemas, and pubs are facing the same challenges as non-food retailers, and in many instances have been even harder hit. Whilst some retail spend can and has been re-channelled online, the same is not possible for the bulk of leisure revenues.

Given the prevalence of leveraged private equity ownership structures across the leisure sectors, many operators are likely to trip debt covenants – survival will be contingent of the leniency of lenders.

Fiera Real Estate’s UK leisure exposure is modest, at >4% of total rent roll across its managed portfolio. As at 27-March, McDonald’s Restaurants had paid rent due, but rent was outstanding from leisure operators including Marston’s Plc, an investment grade credit.

Business Space

The impact of Covid-19 on the office and industrial/warehousing markets is more complex. An increase in online spend vis-à-vis physical retail is likely to support continued occupational demand for logistics real estate.

Notwithstanding this, parts of the manufacturing sector (e.g cars) have halted production which will reduce need for space. In March, Savills recorded over 3m sq ft of new requirements for warehouse space from major foodstores, online retailers, and specialist pharmaceutical logistics firms. Th e surge in demand is likely to be a short-term phenomenon. Irrespective, with industrial vacancy rates at just 6.5%, equivalent to 35m sq ft, there is likely to be some concentrated upward pressure on occupancy rates and rents.

From an office market perspective, the advent of Covid-19 has resulted in an increase in the number of employees working from home. If this forced experiment is successful, occupiers might consider further rationalisation of office space in the future which will result in increased density but lower aggregate demand for space. In the short term, new office occupiers are likely to put space decision making on hold.

Retailers with any form of online presence (i.e. almost all) continue to need logistics warehouse space. Across Fiera Real Estate’s UK office portfolio, one smaller office tenant, a regional professional service business, has sought to change to their rent terms. Larger office tenants, however, have not requested changes.

Investment Markets

Capital Economics base case forecast is for a 10% decline in UK commercial real estate values this year. This forecast assumes 50 bps of cap rate expansion and a 10% one off fall in rents in Q2. Capital Economics’ downside case assumes a 25% fall in value, in line with the global financial crisis.

Transaction volumes are significantly down this quarter and very few new assets have come to market. Most investors are taking a ‘wait-and-see’ approach to assess the full economic impact of Covid-19 on occupier markets before jumping back into the investment market. Across Fiera Real Estate’s UK portfolio, all bar two asset sales have been put on pause by prospective purchasers.

Real estate debt markets are extremely tight and largely closed in the immediate term. Most lenders are focused on dealing with issues surrounding LTV and ICR breaches on existing loans. Banks will need to waive interest and value covenants for Q2 and potentially Q3 2020 in order to avoid a wave of defaults.

In the medium term, Covid-19 is likely to create opportunity in the form of distress as asset owners seek liquidity and pricing falls. This will likely emerge in the summer of 2020, as‘price discovery’ takes place across the real estate market.


Whilst Government policy has been to keep construction sites open, practically construction activity has been inhibited by government mandated ‘social distancing’ measures. Contractors continue to work on all Fiera Real Estate managed schemes, but those are generally at earlier stages of construction so sites are sparsely manned until there is a start on building structures.

Housebuilders have also paused construction. Taylor Wimpey and Bellway have closed down sites, in order to protect staff and likely in view of the potential impact of Covid-19 on sales. As in the commercial investment market, the practicalities of viewing homes will cause problems, which is why we are seeing slowdown in housing transactions. Housing starts are expected to be down on 2019, which may weigh on future consented site acquisition activity.

To date local authorities have continued to manage planning applications remotely. However, delays in planning are expected as a result of absences or stakeholders not being able to work to prescribed timetables. The suspension of council planning committee meetings is also likely to cause problems. The government has sought to encourage more delegated decision making for planning officers or to hold committee meetings via video link, however many authorities are likely to fail to deal with applications and exceed the statutory timelines set for determination.

Conclusions and Key Takeaways

Landlords will need to improve engagement with tenants, adopting a collaborative approach to problemsolving. This is particularly true of tenants in the retail and leisure sectors.

Economic disruption cause by Covid-19 will speed up trends already set in motion i.e the decline of non-food ‘bricks-and-mortar’ retailers, more remote working, more investment into online.

Massive monetary and fiscal stimulus into the market may make little difference in 2020 but will potentially boost asset values in 2021.

Fewer assets will be transacted in 2020 than in prior years as buyers and sellers assess the impact of Covid-19 on the economic landscape.

Landlords will be focused on rent collection, tenant defaults and managing loans, although most banks will want to work with landlords as the problem is so widespread.

As liquidity dries up, potentially in Q2 and Q3 2020, there will be unique opportunities to acquire institutional quality assets at discounted prices – particularly for fast-moving cash buyers, although the window for such opportunities may be small.

A reduction in planning consents will reduce supply of residential sites and alongside a decline in construction output, this will exacerbate housing supply shortages in years to come.

We hope this provides you with a helpful update. Rest assured that the team at Fiera Real Estate is entirely focussed on ensuring that all our assets emerge from the current period of uncertainty in the best possible