January 28, 2021

What’s Next for U.K. Commercial Real Estate?

2021 is already off to a surreal start, but it has nonetheless been coined a “completely new beginning” for the real estate sector as businesses look to turn the page on 2020 and confront the realities of a market that has been transformed by COVID-19. We look at the latest developments across the real estate market as the sector looks towards a post-pandemic paradigm.

CBRE’s Real Estate Market Outlook Report for 2021 predicts “the U.K. worker, employer, consumer, homeowner or renter will never return to pre-pandemic habits… not in 2021 and not ever.” If they are right, this would mean a new beginning for the sector — a shake-up or even a necessary and timely shakedown, as some might suggest.

The U.K.’s economy is not expected to regain levels recorded before the coronavirus crisis until mid-2023, with steady recovery and a growth of around 6% in 2021. Central London’s commercial property sector is projected to gain strength after its £3.9 billion drop in sales last year as confidence to return to the capital rises. Although £8.9 billion of retail development sites, stores and offices were traded in London in 2020, which was down 30% on 2019, there were signs of a recovery in the final quarter following vaccine developments, with sales totaling £4.5 billion in that quarter alone. Volumes are expected to continue to recover over the next 12 months.


There are positive signs that the worst may be over for the office market. Aside from the life sciences sector, which is particularly active due to pandemic generated increases in funding and investment, office take up is likely to remain below trend in 2021. Demand depends heavily on employment growth, which is projected to increase slowly, at just 1.4%. Regional office rents are expected to sustain better than Central London rents, as London employment is expected to heal much slower than the rest of the U.K.

Flexibility in employee work locations will be a popular topic in 2021, with over half of companies already expecting to embrace some variant of hybrid working. This move towards lower office turnout might be offset by repurposing space to help with collaboration, productivity and the social interaction so desperately sought after the isolation ends. There is currently uncertainty surrounding COVID-19’s net impact on office demand and, while the concept of the office is not going anywhere, what offices will look like from hereon in is relatively unknown.

The experience of 2020 has shown that diversity of use is key to resilience in the event of major change at short notice, and one redevelopment to keep an eye on throughout 2021 is Grosvenor’s West End scheme, which has been granted planning consent for a £500 million mixed-use structure connecting Mayfair to Oxford Street. The site will be transformed into 204,000 sq ft of sustainable grade A office space, 33 homes, 67,500 square feet of shops, restaurants, cafes and a hotel. There are numerous features behind this scheme's popularity, such as its retention and adaptation of the historic buildings for contemporary use, its production of 37% less carbon than others built to current U.K. standards and the 360 bike spaces it will provide. Grosvenor’s director of development, Thomasin Renshaw, best describes the impact of their investment as “a major vote of confidence in the West End at a defining moment for the capital’s economy. It will deliver so much of what is needed so badly — new jobs and a boost to the economy.”

Other investors continue to be confident about the long-term prospects for high quality property in leading London locations, with British Land exchanging on a £401 million West End office portfolio, selling a 75% interest in a portfolio of 3 buildings to Allianz Real Estate, and with London’s ‘Cheesegrater’ (The Leadenhall Building) achieving a record long-term office rent for the City of London. Ukrainian energy company Dtek has agreed to pay nearly £110 per square foot for the top floor, demonstrating not only a willingness to maintain a presence in the capital but a readiness to pay a high price to do so.


December 2020 recorded a Construction Total Activity Index of 54.6, which is above the 50.0 mark where growth begins, and significantly healthier than the 8.2 record low scored in April. The forecast for the year ahead looks promising, with stronger underlying demand expected to continue and foreign investors being more prepared to supply finance for U.K. projects now that the risk of a no-deal Brexit-driven depreciation of sterling has disappeared.

Retail Leisure & Hospitality

Supermarkets, homeware and DIY retailers have remained robust throughout the pandemic, but the closure of non-essential stores has placed substantial pressure on retailers’ revenue and will continue to affect performance in 2021 onwards. This pressure will result in a preference for turnover leases and a shift towards lease structures that are shorter, and with improved flexibility for tenants. Excess retail space and dropping values generate opportunities in the short- to medium-term for retail assets to be repurposed to include alternative uses, such as innovative pop-up retail, co-working spaces and mixed-use schemes. Versatile, agile landlords with the ability to rapidly adjust their business models and strategic visions to accommodate what tenants really want (or even need to survive) in the post-pandemic world will be best placed for success in the year ahead.

The success in the vaccination roll-out will be instrumental in the recovery of hotel demand, and hotels with minimal exposure to large gatherings, such as those without conference spaces, will recover fastest. The surge in demand for hotel investment following the 2021 immunization effort, which will allow our borders and airways to reopen, should enable the sector to benefit from a worldwide investor pool once more, even though total U.K. hotel investment fell 70% in 2020. Knight Frank is currently advising on a number of high-value, off-market transactions in London.

Logistics & Warehouse

Investor appetite will increase further in the already booming U.K. logistics sector this year following the pandemic’s permanent impact on online retail and an improved understanding of the role of warehouse space within our essential national infrastructure. The strong demand and weakening supply of sizeable warehouses will cause rents to continue to rise for well-situated assets adjacent to cities, urban areas and other strategic “last mile delivery” hubs.


We expect to see new opportunities to arise in this space as traditional (and even some challenger) lenders leave certain niches creating appetite for others to fill certain voids. We have already seen the launch of Silbury Finance this January targeting £3 billion of lending into development and student accommodation over the next six years, backed by funds managed by U.S. global asset management firm Oaktree Capital Management. And with all eyes on the change of guard across the pond, Schroders earlier this month announced their new full-service European lending platform to be based out of London. The platform includes loan origination, underwriting and asset management across the U.K. and Continental Europe, covering all types of senior lending as well as high-yield and mezzanine capabilities. Earlier in January, M&G announced that they wrote a £303 million loan in December to Singapore based Sun Venture, financing the purchase of an office and retail building at 1 & 2 New Ludgate in London (interestingly situated opposite our London office) from Land Securities for £552 million. M&G cited the long leases, core location and quality of tenant mix whilst rating the financing prospect.

Undoubtedly, this is a positive start to 2021, but the true impact of the pandemic on U.K. debt markets will become clearer throughout the coming months.

Conclusion: Positive Signs, Still Plenty of Uncertainty

The impact of COVID-19 is vast and not yet fully known, but one thing is clear for 2021. As we progress towards some sort of new normalcy, investor strategies will need to be more agile, nimble and versatile than ever before if anything is to be learned in respect of how and where things can be done differently and, in some cases, better. As stated in our commentary on the September Quarter day, we continue to expect a rise in the number of tenants looking to renegotiate leases to take advantage of the “new normal” market conditions. There will be strategic benefit for the majority of landlords to work jointly with their tenants to explore methods assisting their businesses to endure these unique times. Other solutions are, of course, available to be pursued where necessary. Faegre Drinker’s COVID-19 Real Estate Task Force is available to ensure that all matters are carefully considered and that all lease variations, agreements and concessions are strategically agreed and appropriately documented.

For guidance on the real estate challenges presented by the pandemic, please contact one of the authors below.

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