London is actually pulsating in the Easter period. Alongside the more than 12 million inhabitants, tourists from all over the world are streaming through the British metropolis. Whether Westminster Abbey, Trafalgar Square, Big Ben or Buckingham Palace, however, this weekend the hot spots should remain relatively quiet. A little delayed, but then with full effect, Great Britain has switched into shutdown mode. The island kingdom – like many other countries – is hoping to cushion the effects of the coronavirus pandemic with far-reaching stay-at-home restrictions. Covid-19 is a tough test not only for British society and the healthcare system: Europe's second largest economy is also suffering heavily under this crisis. A glance at the FTSE 100 Index lays bare the extent of the misery, with the leading British index having dropped by almost a quarter between January and March 2020. That means the benchmark has posted its worst quarter since 1987. The British property market fell even more sharply: by the end of March, the FTSE 350 Real Estate Index was trading 28.7% below the closing level of the previous year.
The corona shock comes at the worst possible time for the sector, because the property industry on the island was just beginning to recover from the turmoil of Brexit. The decision taken by the British in June 2016 to leave the EU had triggered enormous uncertainty also and especially in this sector of the economy. This became particularly noticeable in 2019 when the British parliament, despite countless debates, was unable to agree on the withdrawal agreement negotiated with Brussels by the then prime minister, Theresa May. Given that environment, it was hardly surprising that the British held back from purchasing property. "Project completions are dragging on and more transactions are failing," commented the Bank of England (BoE) last December on the state of the housing market. Even so, prices had already recovered somewhat by then (see graph). The BoE revealed a more positive picture for the commercial sector, finding that demand for industrial property in particular had been robust in the 4th quarter. "In many areas there were even bottlenecks," the central bank stated. For office space, the larger cities performed better than the rest of the country. View more information on investment solutions on the topic “The British property market: Corona shock meets substance”.
The capital was storming ahead. According to Savills Research, in the 3rd quarter of 2019 London's West End and the City posted the highest increase in rental costs of the top office locations across Europe (see graph). The consultancy believes that the metropolis was profiting from the cautiousness of the previous year due to Brexit. London's unbroken attraction is also expressed in vacancy rates: while at 5.7% the City came in slightly above the European average (5.6%) in the 3rd quarter, in the West End just 4% of office space was unoccupied. When Savills published these figures in November, the experts were reckoning on only a slight rise in vacancy rates and roughly stable rents in London for 2020. Not six months later, this forecast is probably a waste of paper – coronavirus is drastically changing the environment of the British property industry, with its more than 500,000 employees. Nevertheless, the effects are being felt differently from one subsector to another. The retail trade has been particularly hard hit, with many shops having been forced to close.
On the other hand, in the view of Cushman & Wakefield it is precisely high capacity utilisation that will ensure the office property market proves to be more robust than in earlier crises. This compares with the trend towards the home office that has been triggered by the pandemic. According to the consultants, this could see a shrinkage in office space in the future. Cushman & Wakefield also notices resilience from the logistics sector. This was particularly the case for those companies which handle the storage and distribution of products of long-term strategic importance. Among the examples cited by the experts are pharmaceuticals and foodstuffs. In a recent opinion, Cushman & Wakefield also outlines the principal strengths of property investment. "In times of crisis, real estate as an asset class has a stronger attraction for many," the authors wrote. A new cycle in which physical property is prioritized ahead of equities and bonds could accordingly get going quickly. Such a positive scenario would probably also be to the profit of the Real Estate Investment Trusts (REITs) quoted on the London stock exchange. Another point in favour of the segment is that the stock market price of many a property company in the sell-off has fallen below its Net Asset Value (NAV). Nevertheless, it could take a while after the shutdown has ended for confidence to return to investors.
