Buy when there is gunfire on the streets, goes the old adage. But could this be a case of the right time to buy being when there is, well, hardly anything happening on the streets?
Few investments have been as hard hit by Covid-19 as commercial property in central London. As shops and restaurants have been closed, and office staff made to work from home, landlords have struggled to collect their rent. In the six months to September, for example, Shaftesbury, which owns 600 buildings in the West End including 1.9 million square foot of retail and office space, managed to collect only 41 per cent of what was due, falling to 36 per cent in January.
Moreover, many people believe that there will be a permanent shift in the way we work and spend our leisure time. Even when the Covid crisis is over, they argue, we will still want to work from home, and our leisure activities will be focused closer to where we live, with suburbs and small towns benefiting at the expense of large cities. Central London, in other words, faces a future as a relative backwater.
But just when you think a trend has been established, along comes something to challenge it. If some people are going to be able to look forward to a future working via their laptops in the country or suburbs, they won’t, it seems, include Goldman Sachs employees. The firm’s CEO, David Solomon, last week described working from home as an ‘aberration’ that will be ‘corrected’ at the earliest opportunity.
While there are companies that take the opposite line — HSBC says it aims to reduce its office footprint by 40 per cent over time, with more people working remotely — I wouldn’t want to bet against Solomon’s aversion to working from home being the better indicator of the future direction for the office market. After all, plenty of companies have experimented with working from home in the past and found that it didn’t suit them. Many employees didn’t like it, revelling in the chance to get out of their homes. It reduces opportunities from chance face-to-face meetings and makes it much harder to generate a sense of teamwork. The trend over the past 30 years had been very much in the other direction, with office-based businesses becoming concentrated in clusters, such as tech start-ups around the Old Street roundabout. It wasn’t so long ago that WeWork was one of the hottest stocks around, renting flexible office space to growing companies.
The pandemic may have interrupted the clustering of industries, but does it really undo everything that companies have previously learned about doing business? I suspect not, in which case it is worth asking: is this a once-in-a-generation opportunity to invest in central London commercial property on the cheap?
Fortunately, you don’t have to purchase an entire office block in order to gain exposure to central London property. There are several real estate investment trusts and other companies which exist to invest in these assets. The most obvious ways to gain a personal foothold in London commercial property is though Shaftesbury, Great Portland Estates or Derwent London: all listed companies which own significant chunks of property in the West End. Each of them has been battered by repeated lockdowns and, while they have made some recovery since the autumn, all have a long way to go before they regain their previous heights.
The share prices of Shaftesbury and Great Portland Estates are both down 26 per cent over the past 12 months. Derwent London, which isn’t wholly based in London but also owns some Scottish property, is down 21 per cent. All are back to the levels they were at between 2013 and 2014. There is a difference in their fortunes, though. In the fourth quarter of 2020, Great Portland Estates managed to collect 77 per cent of its rent; Shaftesbury only 45 per cent. Generally, landlords have found it easier to collect rent on offices than on shops and restaurants.
British Land and Land Securities (both of which I will confess to owning shares in myself) are big owners of London offices, but they also have large retail and leisure investments outside London — Land Securities, for example, owns Lakeside Shopping Centre. These are assets which had a questionable future even before Covid-19, as online retail began to eat their lunch. Both are now trading at levels last seen a decade ago. Workspace Group is a purer play on the London office market, but it has crashed and burned the heaviest of all over the past 12 months, with shares down 36 per cent. They had been pumped up partly thanks to the WeWork bubble.
Even if people and businesses do flock back to London, any commercial company with exposure to shops and offices is likely to feel the effect on its balance sheet for years to come. But whether these property companies will make good investments over the next few years really comes down to whether central London recovers its mojo as a place to work and enjoy yourself, and whether this happens faster than the market currently expects. Shaftesbury last week reported increasing interest from prospective tenants, especially in the restaurant sector, as the Prime Minister laid out his plan for reopening the country. But then it is notable how few tenants have actually given up their tenancies — while in January it was collecting little more than a third of the rent due, only 10.8 per cent of its space is actually vacant. That could change, however, as the furlough and other support schemes are withdrawn and some businesses are belatedly forced to give up the ghost.
My guess is that London won’t be down for long. It has spent decades building itself up as a global capital with an economy that has soared ahead of Britain as a whole. That isn’t going to be reversed by a pandemic-induced economic crisis which is hardly restricted to London. Employees will drift back to offices, fed up with working in the spare bedroom and fearful of being left behind if they continue to work at home when their colleagues have returned. They will start eating lunch again, going to the theatre again, meeting up in central locations which will continue to be convenient. And with it, commercial property won’t be such a bad investment.
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