UK CRE has shown plenty of resilience despite the uncertainty brought about by Brexit and the COVID-19 pandemic. Initially having an adverse effect on the UK’s commercial real estate market, transaction volumes in recent months are slowly returning to normal.
Following the EU referendum vote, investment enquiries dropped to -16 per cent in the 2nd quarter of 2016, from +25 per cent during the first quarter. Inward investment in real estate also dropped. However, UK CRE was still liquid, with private investors and multinational corporations continuing to acquire property within the country. While Brexit’s legal impact on UK CRE is expected to be limited, it has now been obscured by concerns over the pandemic’s impact.
Investment enquiries dropped to -16 per cent immediately following the referendum results
In this article, we’ll take a look at how the UK’s commercial real estate market has bounced back despite the odds.
The State of UK CRE Post-Brexit
During the Brexit aftermath in 2016, many overseas investors from countries like China, Malaysia, India and Russia continued to invest in high-quality London properties because of the pound’s dip in value.
Demand for residential properties and commercial real estate during that period continued to enjoy relative stability. This is because prime properties in London and in select locations are considered as safe or secure assets. This property type also packs several other benefits for overseas investors, including:
- Advantageous tax treatments
- State-guaranteed titles that bolster ownership certainty
- Low barrier to entry
- Flexibility in property acquisition, wherein a property can be acquired and utilised as a stand-alone asset or as part of a business’s other assets
In 2020, investment into UK CRE, including industrial and office sectors, reached GBP6.7 billion, indicating an 80 per cent increase compared to that year’s monthly average. Secure returns on investment primarily drive international ventures into the UK property market.
UK CRE during the Pandemic
COVID-19 brought on a slew of unprecedented challenges that adversely affected the country’s markets and industries, including the commercial real estate market. CRE property types, such as office and retail spaces, suffered significantly from the effects of the pandemic.
UK Office market was immediately impacted by the referendum
In 2020, property vacancies shot up to 13.8 per cent during Q4 2020. Leasing activity within the country also fell during the same period. However, during the last quarter of 2020 and the first and second quarters of 2021, there was a glimmer of hope as office property take-up slowly regained traction.
Despite the pandemic, UK CRE enjoyed the interest and sizeable investments from overseas investors. In December 2020, GBP2.3 billion was invested in offices. During this period, Sun Venture, a Singaporean multi-asset investment firm, acquired 1 & 2 New Ludgate for GBP552 million. Allianz SE, a German financial services company, acquired office properties in Marylebone for GBP401 million.
Though the country bolstered its COVID-19 response infrastructure with rigorous testing and rounds of vaccinations, the UK still faces many uncertainties. The easing of lockdowns and the lifting of travel restrictions coupled with strong vaccination measures have resulted in global and domestic investment activities that are slowly on the rise.
It’s expected that as the market regains its vitality, returns will become slower, given that assets will increasingly jump to full price. CRE investment volumes were expected to hit GBP 50m by the end of 2021. Furthermore, it’s predicted that in 2022, the UK will experience a 5 per cent economic growth and that tenant demand for CRE will begin to recover.
In the midst of these challenges to UK CRE, we’re seeing a gradual shift toward the commercial property that lends itself well to flexible or hybrid workspace setups. Office spaces that are not only prime spaces, are green or have good (ESG) performance are expected to fare well in 2022.
Flexible and hybrid workspaces have increased in popularity offering workers flexibility when returning to the office
UK CRE, in general, is expected to rise in 2022 as inbound investments from foreign countries like the Middle East and the Far East continue to trickle in. This in turn is expected to help return the country’s investment volumes back to pre-pandemic levels.
We’re already seeing foreign companies make sizeable property investments in the country. Google, for example, has announced a deal that enables it to acquire the London development Central Saint Giles for GBP871 million.
This has been viewed by many as an indication of the tech firm’s drive to encourage employees back to the office, albeit tailored for a hybrid workplace. Unlike traditional offices, these flexible office spaces are intended to nurture employees’ health and well-being, innovation, and creativity. Other US tech companies, such as Meta and Amazon, have previously invested in large London commercial properties.
A Better Way to Visualise Commercial Real Estate
At the end of the day, there’s no denying that the UK still remains one of the most popular and viable countries to invest in. This is particularly evident in growth industries such as digital, health and well-being, real estate and construction. It also lends itself well to redevelopment or refurbishment and now presents options for shorter leases.
While 2D plans are great at showcasing design ideas for these spaces, they can have their limitations. Clients and potential buyers won’t be able to get a good enough feel of the property or visualise different elements like lighting and fixtures.
New technologies such as augmented reality and virtual reality have made it possible for designers, developers, and architects to bring their designs and concepts to life. VR technology is already widely used in industries like learning and development, retail, tourism, healthcare, architecture and real estate.
Forward-thinking companies like revvis employ technology from gaming engines to give occupiers the ability to design their perfect workspace during the marketing of a property
PropTech has paved the way for innovation in the real estate industry and software like revvis is paving the way for more immersive and interactive 3D tours. These, in turn, enable potential occupiers to interact with or better visualise a space from anywhere in the world. This is becoming a particularly powerful tool to connect properties with foreign investors who can virtually explore a 3D model of any property while gaining an intimate understanding of the property. Experiencing the property aids foreign investors understand a building and its potential more than still CGI and 2D floorplans enabling more informed investment decisions.