London has seen £2bn-worth of commercial real estate deals aborted since lockdown began in March, but activity is ramping up. Credit: Shutterstock

After several years of Brexit-related uncertainty, 2020 was meant to usher in a real estate boom for London. Covid-19, however, crashed the party.

Indeed, last year’s Brexit drama and a general election put the brakes on the city’s commercial property market, pushing sales down to £12bn from highs of about £20bn in previous years, according to global commercial real estate services firm Cushman & Wakefield.

This year is set to be even worse. Cushman estimates a market of about £10bn for 2020, assuming there is no second wave of Covid-19 or a post-Brexit trade deal. Nonetheless, considering how unprecedented and disruptive lockdown has been, London’s market is widely considered to be performing well.

Bouncing back

People rarely purchase an asset as pricey as property without first seeing the building. Therefore, it comes as no surprise that lockdown has negatively affected London’s real estate sales.

The UK capital has seen £2bn-worth of deals aborted since the UK went into lockdown in March, according to London-based estate agent Knight Frank. There were just £595m-worth of transactions in the second quarter of 2020, down from £2bn in the first quarter and substantially less than the historic quarterly average of £3.4bn.

“Usually, we would see lots of international investors flying in at this time of the year to close deals,” explains international partner at Cushman & Wakefield Fergus Keane. “The trouble is that if you are coming from Hong Kong, for example, you could land in London, but then have to quarantine for 14 days when you return home.”

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Nonetheless, as lockdown has eased over the summer, activity is ramping up, especially among foreign investors, according to the head of Knight Frank’s London commercial research team, Faisal Durrani.

“In terms of sources of demand, we expect South-East Asian investors to be the first out of the blocks, given that they are ahead of much of the world in terms of easing their lockdown restrictions,” he adds.

Cushman & Wakefield says that it is seeing most demand from Hong Kong and Singapore, but French and German investors, who have better access to London, are also particularly active in the city. Nonetheless, many buyers are still in ‘wait and see’ mode until there is more clarity on Brexit and the pandemic.

Why London?

Despite national and global headwinds, London’s fundamentals present a safe haven to foreign investors in real estate.

“The pound is weak at the moment and London’s commercial real estate is still relatively cheap compared with Paris and Berlin,” says Keane. “Meanwhile, it remains very difficult to invest in the US if you are not American. Leases tend to be six years at most in France and Germany, whereas you could still find a 15-year lease in London.”

This year is the window of time within which to be buying, before the real bounce back in prices and demand occurs, adds Keane. Moreover, with many construction projects on hold, the pipeline of new building stock will be in shortage next year and in 2022, meaning higher rental demand.

“If you have £2bn in the bank, you are having sleepless nights because you are not sure that the bank will be there in the morning,” says Keane.

Indeed, during a global or national recession, bricks and mortar are considered to be some of safest tangible assets to pour cash into. However, for that reason, many owners are not selling properties at the moment.

Home comforts

Another challenge to real estate markets across the world is the working-from-home phenomenon. Although London’s financial services industry is widely expected to remain resilient, it is unclear to what extent people will return to office-based working. This, on top of liquidity pressures, is pushing some companies to hold off signing new leases or buying new office space.

UK Prime Minister Boris Johnson has encouraged office workers to return to work, not least to save central London’s crisis-ridden hospitality industry, a move that some observers have called ‘premature’ in terms of health and safety.

On this topic, director of policy and research at the Centre for Cities Paul Swinney thinks that office work is here to stay.

“Cities’ key advantage… has been their ability to offer face-to-face interaction,” he recently wrote. “History suggests that the importance of face-to-face contact will mean that cities will continue to be a central part of economic and civic life. Distance is not dead yet.”

Keane voices similar sentiments.

“After 9/11 people thought we would stop entering tall buildings and flying,” he says. “They were wrong. We feel very strongly that there will be a return to the office. You needed it for collaboration, for team spirit, and there is value in literally being seen to be working.”

However, given the global nature of Covid-19’s impact, and the length of lockdowns all over the world, it is unclear how much can be drawn from past experiences. Many businesses are reporting that they have found their workforce delivering equal or above-average productivity while working from home. Moreover, whether companies will even be allowed to force their employees to return to the office is a matter of legal uncertainty.

Although it remains something of a gamble, foreign investors are placing their bets on London’s commercial real estate and long-term value as a global economic powerhouse.