AMONG THE assets that adorn the queen’s property portfolio are 17 provincial shopping and leisure centres. On September 18th Crown Estates, which manages the monarch’s portfolio, wrote down their value by 17%, cutting Her Majesty’s net worth by £552.5m ($700m). Set against the £13.4bn valuation of her entire property portfolio, which includes swanky London addresses such as Regent Street and St James’s, that is fairly small beer. But the outlook even for the top end of the market has darkened: the Crown Estates expect “profit and property valuations to be significantly down” over the coming year.
Covid-19 has accelerated the growth of online retailing, hamstrung the hospitality sector and thrown the future of the office into question. None of this is good news for commercial-property owners. The consensus forecast of a recent survey of 24 large property investors and consultants by the Investment Property Forum (IPF), a trade body, was that capital values would drop by 12% in 2020.
The headline numbers hide a lot of variability. Industrial units are expected to perform reasonably well while retail, and especially shopping centres, will take the largest hit. The IPF survey suggests a 28% fall in shopping centre valuations and 20% drop in other types of retail premises. Shopping centres are struggling with the loss of the large department stores that once acted as anchor tenants and widespread closures of chain restaurants that used to draw in customers. A big landlord talks of a rise of “mission-based shopping” and expects people will be less keen to hang around in indoor retail parks in future. Another property investor expects 300 of Britain’s 650-or-so shopping centres to close.
The greatest uncertainty, says Andrew Burrell, head of property at Capital Economics, a consultancy, is over offices, for their future depends on how the pandemic plays out. Estimates for capital values in 2020 for City offices range from a fall of over 20% to modest positive growth.
Nobody quite knows what commercial property in Britain is worth. If, as some trade bodies suggest, it is £1.6trn, then small percentage declines would mean huge declines in value. The IPF put the size of the invested stock (the part of commercial property held for investment purposes) at £512bn in 2018; which, on the basis of guesses about what is happening this year, would mean a decline in value of over £50bn.
Commercial-property busts in the mid-1970s, the early 1990s and 2007 all triggered losses at banks that led to a wider tightening of credit availability with ramifications across the rest of the economy. But this time financial regulators are more relaxed. Banks are better capitalised and less exposed to commercial property than in 2007. Pension funds’ holdings of commercial property have increased in the past decade because of low returns from bonds, but typical allocations are only around 5% of their total assets and even a large fall in capital values would be offset by higher returns this year in other assets such as global equities.
Ownership is more diversified, too. Foreigners own 30% of invested stock, up from 17% in 2007. The Qatari sovereign-wealth fund, with landmarks such as Canary Wharf, the Shard and Chelsea Barracks, is now the biggest owner of commercial property in London by square footage. The Kuwaitis have also been on a buying spree, snapping up City Hall, the mayor’s office, in 2013.
But there will be ripple effects in Britain. More than two-thirds of small-to-medium-sized businesses use commercial property as collateral; corporate investment tends to move in sync with commercial-property prices. A 10% drop in valuations, according to a study, would cut firms’ investment by 1%. A decline in property values would also hit business rates (worth some 1.4% of GDP) and thus public-sector revenues. But though some landlords may fail, and some pension funds and insurance companies take a hit, it is unlikely to be on the scale of 2007-09. ■
This article appeared in the Britain section of the print edition under the headline “A pain in the portfolio”