Setting the scene

The UK economy has fallen by 9.9% in 2020. The sheer size of the fall is unprecedented in modern economic history outside of wartime. But when the first lockdown was introduced, the OBR projected that the economy would tank 35% in the second quarter and despite a recovery would still end the year 13% lower.

On 22nd February, after eight weeks of lockdown, the UK Government finally announced its road map to lifting the third and hopefully final lockdown. If all goes according to plan non-essential shops could open from 12th April, and pubs and restaurants from 17th May. Overseas travel may even be back on the agenda before the end of summer.

Vaccination is protecting the most vulnerable people and the whole of the adult population could be vaccinated by the end of July. The BoE’s Andy Haldane said the economy was about to turn “a decisive corner with enormous amounts of pent-up financial energy waiting to be released, like a coiled spring”.



Commercial Real Estate

All Property 3-month 12-month
Total Return 0.9 -2.3
Capital Growth -0.2 -6.6
Rental Growth -0.7 -3.1
Source: MSCI


When the UK entered its last recession in March 2008, the economy slumped 5.9%. During the GFC All Property capital values plummeted 40%. In the latest crisis, All Property values have only fallen by 5.8% (see Table 1). Clearly banking crises are to be feared more the pandemics.




Total Returns 3-month 12-month
All Offices -1.0 -1.7
Central London -1.8 -2.6
Rest of South East -1.0 -3.1
Rest of UK 0.4 0.3
Source: MSCI


The arguments rumble on regarding the future of the office. Fewer employees working from city centre offices may reduce the demand for space. But social distancing requirements will pull in the opposite direction and may oblige businesses to take on more space.

A British Council of Offices survey concluded that in the future employees at all levels will divide their time between working from home and visiting their workplace. The Institute of Directors agrees but highlighted the problem of managing teams remotely and believes that offices will remain valuable places for interaction and collaboration.

Where possible the whole UK workforce is still under instruction to “work from home”. But Zoom meetings on your laptop, competing with the rest of the family for limited Wi-Fi bandwidth, sitting at the kitchen counter and simultaneously home schooling is wearing very thin.

The biggest office development completion in Q4 2020 was Axa Group’s 22 Bishopsgate with a 20,00 sf food hall and 1.34m sf of office space on 62 floors. Facilities include restaurants, bars, gym, doctor’s surgery, a nail bar on the 41st floor and a climbing window on the 25th floor served by 16 lifts. The building is already 60% let to Apple, NASDAQ International, Hiscox, Axa Investment Managers and others.

Later on this year M&G’s Stanza at 40 Leadenhall Street, EC3 with a further 20,000 sf of retail and 890,000 sf of office space on 34 floors is due to complete. So far only 4% of this building is let.

“Social distancing” makes you wonder how long it will take for staff to reach their desks in the morning and leave in the evening; and whether these buildings, will ever be fully occupied.

In the last three-quarters of lockdown, take-up is 50% to 60% below long term average levels. The amount of office space available to let is increasing across all the UK’s major markets. Availability in the “Big-6” regional centres of Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester has risen 23% since the end of 2019. In Central London the amount of space available to let has risen by 28% over the same period.




Total Returns 3-month 12-month
Retail -2.3 -12.4
Central London shops -7.5 -14.9
SE shops -3.3 -8.9
RUK shops -1.0 -8.1
Shopping Centres -7.4 -26.6
Retail Warehouses 0.2 -10.1
Source: MSCI


From 2009 until 2018 Shopping Centre investment averaged more than £3 billion a year. In the last two years Shopping Centre investment has averaged just over £500m. In Q4 Shopping Centre investment amounted to £74 million.

In December Southend Borough Council bought the 340,000 sf Victoria Centre off a yield of 11%. The centre was built in the 1967 and refurbished in 2008. It is 97% let and occupiers include Next Wilko and Metro Bank.

In another deal Clifton Down in Bristol, a local centre built in the 1970’s with 78,000 sf of retail and 10,000 sf of offices on 2 upper floors was sold by Blackrock to the Sovereign Housing Association. Sovereign, one of the ten largest housing associations in the UK providing affordable housing across the south and south west, is looking at the potential to re-purpose the centre for residential use.

In 2020 Intu collapsed into administration. It carried high levels of debt and fell into breach of its loan covenants as retail tenants withheld rents and entered CVA’s.

The share price of Hammerson, another REIT specialising in shopping centres and owner of Birmingham’s Bullring, fell 82% in 2020. Its attempted sale of seven retail parks collapsed during 2020’s first lockdown after the prospective purchaser exchanged contracts but failed to complete. The company, however, successfully raised £552 million in a rights issue later in the year.

Retail property hasn’t fallen out of favour with funds and other investors overnight. The pandemic has just accelerated a trend that has been playing out for at least the last 10 years.

The 242 year old Debenhams chain fell into administration for the second time in a year in April 2020; shortly after the UK entered its first lockdown. The administrators failed to find a buyer for the whole business with 124 stores and 12,000 staff.

Next will take over the beauty halls in five Debenhams stores in Hammerson owned shopping centres as it seeks to build its beauty brand. In January, online fashion retailer Bohoo paid £55m for the Debenhams brand and website but not its stores.

The 80,000 sq ft former Debenhams in Wandsworth has been taken on by the trampoline company, Gravity. The store will now house an electric go-karting area, bowling lanes, pool, darts and crazy golf.

Boohoo already owns Oasis, Coast and Karen Millen but not the associated stores and is also expected to buy the remaining Arcadia brands, Wallis, Dorothy Perkins and Burton.

Sir Phillip Green’s Arcadia employed 13,000 staff and traded from 500 stores when it went into administration in November. In February another on-line only retailer, Asos paid £30 million for the Topshop, Topman and Miss Selfridge brands.

In December 2020 the high street vacancy rate across Britain rose to 13.7%. This was the tenth consecutive quarter of increasing rates since June 2018.

Helen Dickinson OBE, Chief Executive of the British Retail Consortium, said:

“With the country in and out of lockdown, the forced closures of thousands of shops, and consumers reluctant to visit town and city centres, it is unsurprising that the number of shuttered stores continues to rise. Over the past two years, one in every 50 outlets has permanently closed, and this number will only go up.”




Total Returns 3-month 12-month
Industrials 6.4 9.2
London 7.9 12.3
Rest of South East 5.5 8.0
Rest of UK 5.8 7.6
Source: MSCI

Historically, industrials have made up 15% of the IPD / MSCI index. Today the allocation to industrials is 29% and industrial capital values have surged 82% in the last ten years.

There has been a structural shift in the character of real estate markets across the developed world. Historically, in the UK prime retail yields were 4% or lower for the best locations while industrial yields were above 7% and in in some cases closer to 10%.

Today, retail is being valued off multiples of 14 times income or 7%. Industrial is trading off multiples of 22 or 4.5%. In October, Segro bought the 228k sf. Electra Park warehouse estate in Canning Town from Schroders for £133mn off an initial yield of 2.6%

In 2008, internet retailing accounted for less than 5% of retail sales. By February 2020, the internet’s share of retailing had risen to 19%. Lockdown and the closure of all non-essential retail premises caused internet sales to climb to 36% of total retail sales in December.

This has fuelled the occupier demand firstly for big box warehouses characterised by Amazon’s fulfilment centres and secondly for last mile urban logistics to supply the white vans that deliver to the front door. Where there is strong occupier demand, real estate investors will follow. Hence the somewhat cliched mantra of sheds and beds meaning a focus by real estate investors and fund managers on industrials and residential.

Last summer, Segro raised €450 million on the debt markets with a coupon of 1.6%. In October the REIT paid £133m to Schroders for Electra Park, E16. The initial yield was 2.6%. The estate provides 220,000 sf in ten units close to Canary Wharf and London City Airport.

Overseas investors, QuadReal and Valor Real Estate, paid £42 million to L&G for a six unit 130,000 sf industrial estate in Barking, Essex. The initial yield on this deal was 2.1%.

Demand for urban logistics is so strong that developers are considering building underground. Plans for a 1.9mn sf. underground warehouse near Heathrow were approved in 2017.

GLP, formerly known as Gazeley, has plans for a multi-storey warehouse in Silvertown. The warehouse will total 426,000 sf. comprising 3-storeys of 140,000 sf with 26 access docks and 75,000 sf. of ancillary office space.



What next?

FK’s central forecast for the year ahead remains cautious. It depends on epidemiology, including the length of the current and any further lockdown and the speed of the roll-out of the rest of the vaccination programme, as much as on the usual macro-economic drivers.

Macro-economic forecasts suggest that a return to 2019 levels of output will be delayed to 2022. Consequently, we expect the decline in retail and office capital values to run beyond the end of 2020 and into 2021. Although, 2020 will witness the largest proportion of the pandemic related fall in capital values.

All Property forecast – December 2020
  2021 2022 2023 2021-23
Total Return 4% 7% 7% 6%
Capital Growth -1% 2% 3% 1%
Rental Growth 0% 1% 2% 1%


For further information, please contact:
Paul Morris


t: 07771 816 347

Geoff Egan


t: 07500 787 300