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Investment Brief - Summer 2020

The definitive guide to UK commercial property investment

UK commercial property overview and outlook

The economic impacts of the coronavirus-induced social lockdown from mid-March initially came through on the higher frequency business sentiment and unemployment figures. These now also feature in part in the Q1 GDP growth and commercial property returns data. Economic output fell 2% quarter-on quarter, which suggests that GDP growth will be around -14% for Q2 and -8.3% for 2020 as a whole.

Many Q1 commercial property investment transactions had already occurred or were at an advanced stage so the ostensive drop appears relatively modest. The first quarter also featured some exceptionally large deals – Blackstone bought the £4.7bn iQ student accommodation portfolio and the £500m Hansteen industrial portfolio, and a Qatari investor paid £700m for the Ritz on Piccadilly. Stripping out these exceptional transactions, the investment total was down 45% quarter-on-quarter, which is ominous for the Q2 total deal volume.

The commercial property sector remains comparatively attractive to income investors verses the stock market, where dividends have been suspended or reduced. Nevertheless, property yields moved out sharply at the end of Q1, notably for Retail and Leisure, where business operations have been hardest and most directly hit. For 2020 as a whole we expect rents to fall 4.2% and yields to soften by 60 basis points – driven very much by the beleaguered retail sector. This will cause a 14% fall in capital values and generate a total return of -10.4% before stabilising in 2021 without a significant bounceback.


The industrial segment has fared better than other property segments, notably larger logistics and data centres associated with the increase in online shopping and working. Smaller multilet units with a greater proportion of direct-trading SME tenants have been more vulnerable. There is a broad cross section of investment buyers with activity focussed on secondary where pricing has slipped 5%-10%. Defaults and voids are forecast to rise from late 2020 but not reach 2009 levels since the modern occupier base is strong and diversified while new supply is tight. A relatively modest 40bps outward yield shift is expected by the year-end.


Office investment is weak while social distancing limits viewings to a greater extent than its industrial counterparts. The June quarter rent collection is likely to be worse than March, potentially triggering sales in poor performing assets. The
impact of the coronavirus on capital values has been felt more in UK regional markets, with core London assets showing more resilience. Overseas investors were the most active overall in Q1, but ongoing travel restrictions suggest that UK-based investors
may be able to benefit from less competition later in 2020.


Retail property has been hit particularly hard due to the direct lockdown measures on trading units coupled with the accelerated trend to online. Many retailers are suffering significant cashflow difficulties and rent collection has been and is expected to be poor. Government intervention is unlikely to be sufficient to stem the tide of administrations. Shopping centres saw a 10.5% fall in capital values in Q1 alone, with the largest shopping centres most affected. This follows the recovery that never really materialised after the global financial crisis. The chart shows retail capital values that stalled relative to the other property sectors and that are forecast to be only 43% of their 2007 pre-crisis peak by the end of 2021. This fundamental shift and very negative sector outlook points to more ‘repurposing’ of retail property to alternative uses in future, especially in London.

The industrial sector has fared better than other property types given the surge in occupational demand immediately post-lockdown and the acceleration of internet retail and the home delivery market.

Nick Ogden, Partner, Capital Markets

Key Contacts

John Rodgers


Lloyd Davies


Steve Sharman


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