"History doesn’t repeat itself, but it often rhymes." – A view on the property industry

I started writing these articles at the beginning of the first lockdown in 2020 and have since found that continuing to do so, particularly through the pandemic, gave me a cathartic release and connection to the property industry. Without realising it the last 6 months have slipped by since my last piece. The real world has been returning to ‘normal’ (you can decide if it is the ‘old’ normal or a ‘new’ normal) and the daily time requirements from work and family gave me little time for research and writing.

The real estate team at Memery Crystal has enjoyed a strong period of transactions for new and existing clients, including the sale of Boston House for the Dragon, Touker Suleyman, the purchase of an office building in the City, the sale of a warehouse for a 253 room residential development, as well closing 2021 with the successful sale and purchase for the same client of investment properties in London. Other transactions include the sale of a dance academy business and their prominent north London building, the purchase of a prime West End office building for an owner occupier and the refinancing of a substantial commercial portfolio, amongst other matters. The firm also acted on the substantial sale of a caravan park for £140M, led by my co-head of Real Estate, Alastair Moss.

The economic outlook

In the late months of 2021 and the start of 2022, the increasing confidence from pandemic unlocking and business advancements gave succour to the idea that ‘building back better’ was more than politicians’ platitudes and that we might, finally, be in a period of post-Brexit, post-pandemic stability. By all accounts MIPIM had the feel of previous years and there was a strong feeling that life was taking off and we were finally in line for some stability in the markets and geopolitics. That was short lived and since then the Russian invasion of Ukraine has not only exacted a terrible toll on human life but has also damaged many components of the financial markets. In Britain economic growth is now expected to halve this year as a result of soaring inflation, hefty tax rises and the destabilising shock caused by the war. A leading business lobby group has warned that inflation is expected to hit 8% and the UK will go from being the fastest growing economy in the G7 to the slowest. Stagflation is a reality.

It is still too early for CPI levels and most economic data to reflect the impact of the Ukraine conflict, but central banks could not wait for the full Ukraine fallout and ran out of patience with inflation, embarking upon a potentially long cycle of interest rate rises. Although the Bank of England was first, the Fed made the most impact on markets by outlining a series of seven interest rate hikes this year. This was promptly followed by a more hawkish tone, leading markets to expect eight hikes this year, including at least one 0.50% rate increase, as opposed to the standard 0.25%.^[1] In addition, the risk of lockdowns in other parts of the world persist, as Reuters reports that three-quarters of Beijing’s 22 million people lined up for COVID-19 tests on Tuesday (26^th April.) Authorities in the Chinese capital raced to stamp out a nascent outbreak and avert the debilitating, city-wide lockdown that has shrouded Shanghai for a month, as part of their ongoing containment policy.

Real Estate market overview

In the property world however, the early part of the year seemed to be somewhat detached from these realities. Knight Frank’s recently published annual London Report confirmed that a wall of money still exists ready to take advantage of opportunities in the capital:

“In our recently conducted Capital Tracker Survey we asked global investors about their intention to invest in London offices in 2022. This revealed a targeted capital allocation of £48.1bn, up from £46.0bn in 2021. The change was driven by large rises in target allocations from US and European investors and a fall from the Greater China region. There is clearly very strong appetite to invest to London offices, however, opportunities to invest are affected by limited availability of institutional quality assets. This weight of capital combined with well-functioning debt markets provides the basis for financing the redevelopment of the built environment that is underpinned by sustainability goals.”

In terms of occupational requirements, the Estates Gazette reports bullish figures as well, and that demand for central London offices is a third higher than the five-year average, according to the latest statistics from Savills. At the end of March 2022, requirements stood at a record 10.6m sq. ft, marking a 34% uplift on the five-year average. One such deal being contemplated is Tata Consultancy Services’ move to lease around 50,000 square feet at 22 Bishopsgate, where rents have ranged from £65 – £85 per square foot and the EG also reporting a surge in office leasing in the West End’s most exclusive post codes with more than a quarter of take up going to finance occupiers, with rents exceeding £150 per square foot.

A statistic that caught my eye recently confirmed that as a result of urban agglomeration for the first time in history, more than 50 per cent of the world’s population lives in cities that take up only 2.7 per cent of the Earth’s land.

In the ongoing ‘return to the office’ debate, the trend continues to move back towards more face-to-face time, concurrently with more firms moving into London. Companies see London as a key tool in the war for talent as socialising and cultural life is now back in full swing. Various incentives from free food, massages, free childcare and ‘Welcome Back Kits’ curated from local businesses are offered to tempt staff back to their desks, and in some instances the appointment of a chief happiness officer to oversee these initiatives (seriously)!

The attitude to how much time you should spend in the office remains far from settled, with some large law firms for example requiring that 50% of time should be spent in the office – 2 days one week and 3 the next, whilst other employers are insisting on a full-time presence and others none at all. Perhaps the complexity of the arrangements is still putting people off coming in more often, for fear of overstaying their allocated welcome?

Serviced offices are still benefiting as those that have shed their physical space utilise alternative arrangements, whilst they establish what their future requirements will be. IWG reported ‘unprecedented demand’ as recent reporting showed that revenue rose 18%.

Meanwhile, The Mail reports that Canary Wharf Group have teamed up with the Eden Project to create a “green spine” of parks and living gardens through the Wharf to create an environment that would entice bankers back to their offices.

It seems that employers are trying all number of tricks, with the hardest nose approach being from the government itself and Boris Johnson is now facing a cabinet backlash over Jacob Rees-Mogg’s “Dickensian” plans to force civil servants back to the office and his “polite” notes left on civil servants’ desks, saying “saying “sorry you were out when I visited”. The minister for Brexit opportunities and government efficiency suggested that civil servants could lose extra pay in the form of the “London weighting allowance” unless they went back to their desks.

Today, even as workers return to offices and customers to stores, Pret-A Manger and its rivals are being forced to hike prices as they stare down the barrel of double-digit inflation, while the same rise in the cost of living threatens to dent consumer spending. Pret-A-Manger’s bestseller[2], a tuna and cucumber baguette, has risen from £2.99 in December to £3.15 today — a jump of 5.4 per cent. A chicken Caesar and bacon baguette has gone up 6.5 per cent from £3.99 to £4.25. The Pret coffee and drinks subscription, which allows customers up to five drinks a day, is up by £5 to £25.

These price rises are way ahead of the official rate of inflation, 6.2 per cent and some predict it could soon reach double digits. The 25 per cent increase in Pret’s subscription is an early taste.

In the high street there is some renewed hope for the beleaguered sector, as the number of vacant premises declines. I have written in the past that my expectation was that there would be a minimum threshold level at which retail would stabilise from its freefall. Whilst there are still many vacant units on the high street, the Times reports that the number of empty shops and restaurants in Britain has fallen for the first time since 2018, prompting hopes that a post-pandemic recovery may be under way.

In the second half of last year the national vacancy rate declined by 0.1 per cent from the first half to reach 14.4 per cent of all shops, according to the Local Data Company. The drop is the first decline in national vacancy rates in three years.

The retail vacancy rate had hit a record high of 15.8 per cent last year but has since decreased slightly. There remains a serious effort required to repurpose the remaining unwanted units. Doubt has been cast on mooted new laws to force landlords to rent out shops that have been left empty for more than six months via compulsory rent auctions, as part of the Levelling Up and Regeneration Bill. This seems like a dangerous and probably unworkable level of interference in private ownership of property and if it is utilised, I can see potential for judicial review cases being brought forward to challenge these initiatives. Some larger landlords are devising innovative solutions for vacant units, reports the Estates Gazette (23^rd April edition), including Landsec, which launched one day leases for retail and leisure occupiers as part of a package of new offers to improve access to space for tenants.

Some legal updates

Another important change for the property industry is the government’s introduction of a ‘Register of Overseas Entities’, to be maintained by Companies House. This is designed to crack down on foreign criminals using UK property to launder money and was enacted on 15 March 2022 via the Economic Crime (Transparency and Enforcement) Act 2022.

The new register will require anonymous foreign owners of UK property to reveal their identities, to ensure criminals cannot hide behind secretive chains of shell companies, setting a global standard for transparency and require details of the beneficial ownership of overseas entities. A failure to comply with this would mean that the overseas entity cannot be registered at HM Land Registry. After a six-month transitional period, if the overseas entity already owns UK land and they sell, charge or grant a registrable lease of that land, the purchaser, charge or lessee will not be able to register the disposition at HMLR unless the overseas entity has been registered on the register and complied with the annual updating obligations. The date for implementation of the Act is not yet known.

Whilst the Act can be traced back to 2016 when the then Prime Minister, David Cameron, gave a warning to foreign companies in an anti-corruption summit that they would be required to disclose the beneficial ownership of UK property it was a back-burner until the events in Ukraine re-ignited a desire to push through the Bill and it was fast tracked through Parliament.

This measure forms part of the government’s strategy to combat economic crime, while ensuring legitimate businesses continue to see the UK as a great place to invest. For more information see here.

In the residential arena, the government has confirmed that it has reached an agreement with the housing industry to contribute £5 billion towards making buildings safer following the Grenfell Tower fire in 2017 in which more than 70 people died. Some larger developers had been holding out from signing up to the initiative on the basis that the final financial obligation was unquantified, but they have yielded in the face of Michael Gove’s threats to withhold planning and building regulations approvals, as well as the threat of potentially significant bad publicity.

Whilst we look to the future of the market, there is still much to be resolved from the pandemic years and Memery Crystal continues to advise clients on the issue of rent arrears. The Commercial Rents (Coronavirus) Act 2022 came into force on 24 March 2022. This brought the mandatory arbitration scheme for protected rent debts into effect, as well as formalising the moratorium on enforcement of these debts.

The moratoriums on enforcement options for non-protected rent debts were also lifted with effect from 25 March 2022, restoring traditional enforcement remedies. For further advice in relation to these matters, from a landlord or a tenant perspective, please contact us and we would be pleased to assist you.

Evergrande

In my October opinion piece I commented on the Chinese development company Evergrande and the $300bn of debt that it needed to refinance.

Some of the statistics around Real Estate in China are interesting, where 30% of China GDP is from the real estate industry. This compares to 13% in the USA.

Evergrande has 1,000 projects across China and had driven an economic boom. Now however 20% of housing stock is unoccupied. The aforementioned debt of $300bn is owed to 170 banks in China and another 120 around the world. There would be deep effects if it collapses and whilst it has not as yet, it is already being spoken of as its “Lehman brothers moment”. It seems that this was a wanton act of self-harm by President Xi Jinping himself, as the crisis was sparked by new regulations around acceptable debt levels a given company can carry. One expert described it as “controlled demolition deliberately triggered by the regime”. The reason – because runaway capitalism makes him uncomfortable. Whilst no collapse has happened yet, it seems it may not be inconceivable.

Top 5 tips for choosing advisers

Finally, for anyone reading this that is involved in the appointment of professional advisers, I strongly recommend the recent article in the Sunday Times by Julian Richer, where he set out his top 5 tips for choosing advisers (lawyers were the first example on his list…):

1) It is not the highest paid who are necessarily right.

2) Advisers aren’t commodities, so don’t just look for the cheapest either. It is the quality of the advice that is important.

3) The best specialists can be great, but problems often comprise several components, so try to ensure they have general knowledge, too.

4) Advisers can be intimidating, which annoys me; and the more confident and slick they are, the more I worry.

5) If you find a good one, try to build a rapport with them; the better they know you, the better they can advise. Don’t penny-pinch on their bills and pay them on time; you don’t want to lose them.

Needless to say, I couldn’t agree with him more…

Disclaimer: We at Memery Crystal (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors of articles published on our website(s) do not necessarily reflect the opinions, views, practices and policies of either Memery Crystal or RBG Holdings plc.

[1] Commentary courtesy of Canaccord Genuity Wealth Management

[2] Details from the Sunday Times