Magazine Issues » Dec 2018-Jan 2019

LEGAL EASE: Changing offices

Andrew_KinseyThe past year has seen significant change for the UK commercial office investment market. A combination of factors, both international and domestic, has contributed to fluctuation in the sector and 2019 is forecast to be an eventful – but potentially very fruitful – year for those who have the appetite and resources to adapt.

The uncertainty clouding the future of financial services and the economy following the UK’s departure from the EU started to affect funds’ appetite for commercial office investment in 2018. As the year progressed, funds increasingly sat on their hands as short and medium-term fortunes became harder to predict. Brexit uncertainty has had a tangible impact on tenant demand and on valuations of commercial property, which saw ‘Brexit clauses’ given greater prominence. These stipulate that values can’t be guaranteed following the Brexit deadline in March. It’s little wonder that asset managers are reluctant to gamble shareholder money in a market with such a pronounced blind spot.

But one person’s threat is another’s opportunity. The space left by some of the funds has been filled by cash-rich private family office investors, looking to price and buy risk. These are actively pursuing product, especially (soon to be) vacant properties. As they don’t have institutional shareholders to assuage or short-term debt pressures, they can take longer-term views on the returns available. These private offices will continue to be a force to be reckoned with, at least until the shape of the post-Brexit landscape emerges and larger funds can more accurately predict short and medium-term results.

WeWork and other shared workspace providers have been major disruptors in the office market. They are the Uber and Airbnb of the sector. Co-working spaces have changed the market for small-sized office tenants looking for flexibility. Many of those tenants are eschewing ten or 15-year leases in favour of shorter-term, fixed-cost arrangements. Terms of these occupancies are typically more flexible, tenants pay no overheads and can move in immediately, with no fit-out costs.

‘Traditional’ landlords are adapting to meet this development, offering shorter-term, all-inclusive leases with more of the convenience, amenities and experience that are associated with the disruptor brands. Investors will be looking to deliver more such products, which can compete in a diversifying market.

While opportunity is still extensive in commercial office investment, exactly what the investment landscape will look like by the end of 2019 is unusually difficult to predict. Brexit, WeWork and the like suggest the market may be quieter, but there is also going to be an often under-reported shortage of vacant quality space coming to the market in London which should shore up values and returns.

The government has planned changes to corporation tax and the registration of beneficial ownerships, both of which will affect overseas investors. However, these will broadly bring the UK in line with other territories and so shouldn’t have a groundbreaking impact. Instead, the insurgence of consumer-driven brands and the impact of Brexit competing with a shortage of quality product and cash-rich, risk-savvy private investors will be the factors which define the year ahead.

Andrew Kinsey, partner with Winckworth Sherwood

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