The recent fall into administration of a 313,000 sq ft office block in London’s Canary Wharf confirms fears that investors in the capital’s commercial property market may wait longer than expected for recovery.
Formerly the London head office of Bear Stearns before its collapse in the 2008 banking crisis, the 12-storey 5 Churchill Place is currently let to various companies in the financial services sector. Its tenants are working differently these days: Monday to Friday office occupancy across the UK is estimated to be below 30% at present and slightly less in London. Post-pandemic, about 40% of UK working adults work from home at least one day a week, according to the Office for National Statistics, compared with 12% before 2020.
It’s a long term factor influencing the scale and quality of businesses’ needs for office space – half of large multinationals plan to cut space in the next three years. Those already locked in to agreements just have to accept the workplace will be quieter and possibly empty on Fridays. But the more immediate danger in the market lies in financing.
Higher interest rates are impacting costs for developers, the appetite for lending against commercial property is shrinking and the outlook for commercial property values – which seemed to have shown signs of stabilising earlier this year – isn’t promising.
Capital Economics says that higher-than-expected core inflation means interest rates are set to be higher for longer. A mild recession is still on the cards for later this year. The overall backdrop for commercial property is poor and yields will need to rise further. Either the rent being paid needs to go up, or the value of the property has to go down, or a bit of both.
Consensus figures suggest that only UK retail warehouse capital values are set to rise modestly in 2023, while other commercial properties will fall by low single figure percentages and offices by more than 7%. Investment volumes remained subdued in the first quarter of 2023, according to JLL, with £2.1 billion traded across Central London. This was significantly below the record Q1 of £5.3 billion traded in 2022 and 28% below the 10-year Q1 average of £3.0 billion.
There are bright spots: Asian investors are still interested in big (£100m+) central London deals. Another positive is that systemic financial problems are unlikely to arise from UK property issues – and vice versa: UK lenders’ exposure to real estate debt is only at 6% of all debt, against more than 12% ahead of the 2008 financial crisis.
Greater risk for investor-owners and banks may, however, lie regionally: large foreign buyers are scarce; tenants’ businesses are failing because of rising staff and energy costs, while revenues are squeezed by broader demand factors; and sectors such as ‘physical’ retail, hospitality and light industrial show few signs of recovery.
Needless to say, all stakeholders in the fragile UK commercial property market need to stay ahead of the game with early negotiation on refinancing and taking pre-emptive action on the future of their company structures. The restructuring and insolvency toolbox is large and deep for those in need of a creative approach to ensure business longevity.
Written by James Bryan, Restructuring Manager at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.