Catalysts for distress, such as COVID-19 pandemic, often lead to changes of ownership composition within the UK property market. Some investors see this distress as a buying opportunity whereas others will sell as assets re-price and risk perceptions alter
These market changes can be economic, political or financial and each impacts owners in a different way. Since the onset of COVID-19 we are seeing lower levels of tenant velocity, slower economic activity and greater levels of tenant default across most sectors. These risks are assessed differently by different buyer types and trends are beginning to emerge about who the buyers and sellers will be over the next 12 months.
Overseas buyers are significantly impacted by travel restrictions and are logistically challenged to conduct business in the UK for the foreseeable future. Geared investors, such as property companies, are cautiously watching their June quarter day rent demands and seeing if the pattern of tenants refusing to pay landlords continues. Banks are cautiously watching their July interest payment dates to see if landlords subsequently refuse to re-pay their loans. In this scenario an economic crisis swiftly leads to a financial crisis as loans become impaired and lenders begin to hold cash rather than lend it. Many corporates are dusting down their operational real estate portfolios with some agreeing sale and leasebacks to shore up balance sheets. Many REITs are struggling with their share prices and are likely to sell assets to pay down debt. All of the above groups are likely net sellers over the next 12 months.
Who is emerging as active buyers in the UK?
Despite a significant fall in trading volumes in Q2 of this year, there is still strong demand for certain sectors and therefore pricing in these sectors has remained constant. Demand for long dated secure income has increased dramatically as institutional investors have sought covid resilient assets that are perfect for cashflow and liability matching, such as urban food stores and last mile logistics. Examples of which include seasoned investors such as London Metric and Segro.
Central London is perceived as a safe haven in times of global turmoil with activity from wide ranging audience leading to competitive bidding and price discovery showing little change since before lockdown. This includes Asia Life Fund (M&G), a range of new and existing Asia Pacific investors and new US money to London on more value add projects. With… logistics and industrial aggregators such as Blackstone, ARES and Urban Logistics REIT, convinced of structural changes within the market, have been bidding at pre-covid levels on the small volumes of stocks offered for sale.
We have also witnessed the return of a number of traditional UK pension funds who were previously outbid by ‘new market entrant’s and who now see the current environment as a chance to secure good quality real estate at rational prices. Another large active group of buyers are the local authorities seeking to invest ahead of the pending changes to local government borrowing.
If we experience further economic distress and subsequent pricing correction, there is a vast swathe of private equity money poised to strike but only on the basis these buyers can deliver the double digit returns they promise their investors. This group has largely been inactive over the last 3 years as the market, in their eyes, became over heated. That said, the billions of pounds they have raised is still ready to be invested.
So, how will the rest of 2020 play out? In certain sectors there is no current supply demand imbalance and ownerships are likely to remain unchanged. In sectors exposed to operational risk and increased tenant default we envisage some forced sales with existing owners replaced by private equity buyers who have the deep pockets and requisite skills to weather this storm and in turn exploit any pricing correction.
In short, we will inevitably witness a change in ownership composition over the next 12 months and that is without considering the potential impact of further government and local authority intervention should the lockdown continue longer than envisaged.