"If we take a long-term perspective, there are plenty of reasons as to why we can expect London’s commercial property market to rebound in the future."
It is clear that the Covid-19 pandemic has fundamentally transformed the way businesses operate. With the announcement of the first lockdown in late March, the private sector was suddenly forced to adapt to a new environment that many were simply not prepared for.
Since then, there has been a clear shift in the way companies operate internally, as well as the manner in which they engage with customers and clients.
The financial services sector is no exception. Digital communication channels have become fundamental to the everyday running of different organisations which have readily embraced remote working. This remained the case throughout the summer, even when social distancing measures were relaxed and the Government was encouraging businesses to return to the office in some capacity.
Yet now we find ourselves in a second national lockdown. Importantly, this is by no means as strict as the previous one. What’s more, the vast majority of organisations in the financial services sector have already put in place new processes and systems to accommodate their employees working from home.
This brings me to some interesting questions that those involved in the commercial property market are beginning to ask. Namely, does Covid-19 symbolise the beginning of the end for the commercial real estate sector? With businesses readily embracing remote working, are organisations more likely to downsize their offices to cut costs? And what implications could this have on the future of London as a metropolitan hub?
At the moment, we can only speculate on the above based on anecdotal evidence. Nonetheless, there are some inherent possibilities to consider when thinking about the future of commercial property in London.
Dropping commercial property demand?
At the height of the first national lockdown in Q2 2020, the majority of UK employees worked from home. As a consequence, places like the City of London, a thriving epicentre for the financial services, became a ghost town. At the time, there was no telling when the pandemic would be resolved. Ultimately, this led businesses to consider remote working as a long-term solution.
The commercial property market has suffered as a result. Research by the Royal Institution of Chartered Surveyors predicted a sharp nationwide decline in office rents. Its Q3 survey revealed that 78% of respondents consider the market to be in a downturn. On top of this, a net balance of -52% of respondents expect prime office rents to fall as a consequence of diminishing demand. For secondary commercial property, this net balance stands at -64%.
These are interesting findings, which demonstrate just how significant the impact of Covid-19 has been on commercial property. At the beginning of the year, commercial development in the capital was booming as a consequence of domestic and foreign direct investment flows. Now, with the pandemic compelling businesses to work remotely and fears of a recession on the horizon, much of this appetite has dampened.
Commercial property will remain vital in London
There is plenty of commentary in the press about the fact that Covid-19 has triggered a fundamental shift in professional work practices. Being physically present in an office five days a week no longer seems necessary for a number of industries. While this will no doubt result in companies downsizing their office spaces in the capital, I do not believe that the impact of the pandemic will replace the fundamental advantages of having an office in London. This is particularly relevant for the financial services.
At Butterfield Mortgages Limited, we regularly deal with wealthy clients and the brokers who represent them to provide bespoke prime property mortgages. We have naturally transitioned to digital avenues of communication which have proven for effective. However, these are only temporary solutions in my mind. The reality is that professionals in the financial services sector value the importance of physical meetings and engagements.
I also don’t anticipate that remote working will permanently replace working in an office. There are many benefits that come with working in an office, particularly when coming up with solutions to challenging problems, or simply engaging with employees to provide the necessary support. It caters for an organic workplace instead of one that is structured by scheduled conference calls.
If we also leave commercial concerns to one side, there are also significant benefits that come with working in a thriving cosmopolitan city like London. Not only does it boost one of the world’s leading financial hubs; professionals are attracted to the capital for everything from exhibitions and galleries through to restaurants. This reputation has been established over many years and will remain intact.
A recovery on the horizon
The above analysis is a reflection of my observations as someone who works in the financial services sector in London. Importantly, there is a need to recognise that the commercial property market will have to naturally recover from the pandemic. This could take months or years. However, if we take a long-term perspective, there are plenty of reasons as to why we can expect London’s commercial property market to rebound in the future.