The UK property market revolution is set to continue in 2019
It is no exaggeration to say that the UK property market is undergoing a revolution at the moment. The housing crisis has prompted some radical proposals from the government, the high street seems to be in its death throes and the traditional office market is being transformed by the rise of co-working and flexible workspace. As we head into 2019, partner Mitchell Griver looks at the changes taking place and what we can expect in the new year.
This is disastrous news for landlords. Some landlords are, in effect, being held to ransom by retailers.
"Death of the high street"
You can hardly open a newspaper at the moment without reading about "the death of the high street". House of Fraser is the biggest retail collapse (so far) in a year that has also seen the demise of Evans Cycles, Maplin and Toys R Us to name a few. It is estimated that 1,772 stores disappeared from UK high streets last year and the figure this year is likely to be higher still.
The reason is obvious: online shopping. More than 18p out of every £1 spent by shoppers is now spent online. Ten years ago, this figure was just 4.9p.
This is disastrous news for landlords. Some landlords are, in effect, being held to ransom by retailers going into administration or entering into a company voluntary arrangement (CVA) who demand reduced rents or otherwise threaten to vacate their stores.
Some of House of Fraser's landlords have refused to agree "non-negotiable" terms with the store's new owner, Mike Ashley's Sports Direct, and as a result labelled "greedy" by Ashley and blamed for store closures. Negotiations between the two sides have been described "as a game of chicken" in the property press. It's a game that is likely to be played out between more struggling retailers and nervous landlords over the months ahead.
From retail to residential
In the meantime, there is a chink of light for retail landlords. In the autumn budget, chancellor Philip Hammond announced the creation of a £675m fund to help councils transform their retail zones.
"If British High Streets are to remain at the centre of our community life, they will need to adapt," Mr Hammond said. Part of the money is earmarked to be spent on turning high street shops and commercial buildings into homes. The Federation of Master Builders estimates that between 300,000 to 400,000 new homes could be created by using empty space on high streets and above shops.
With the growth of online shopping showing no signs of slowing down, many landlords will need to embrace these changes and think of their commercial and retail premises in a new way.
The changing office market
Another sector that is going through radical change is the office market. When I started practising (a few years ago admittedly) "institutional" leases were for the most part for a term of 25 years, imposed full repairing and insuring obligations on the tenant and had five yearly upwards only rent reviews. Over the years this changed gradually; lease terms became shorter and often gave the tenant an option to break after a fixed period. The landlord still held the whip hand though and most leases were unduly onerous on tenants.
Technology in the form of laptops, smartphones and the cloud has changed the way people work. They no longer need a desktop computer linked to a server and a fixed desk. This has led to the rise of flexible workspace operators such as WeWork, Regus and The Office Group.
Tenants now demand flexibility and the ability to come and go from leasehold premises more or less as they please. The nature of office premises is changing too as occupiers insist on on-site facilities such as coffee shops, gyms and break out areas as a matter of course.
To give you an indication of how much the market has changed, WeWork is now the biggest office occupier in central London. And institutional landlords such as British Land, Land Securities, the Crown Estate and Legal & General have all launched their own flexible workspace operations. Legal & General has even announced a new short form lease for tenants of its flexible workspace brand which it describes as "a clear standardised lease … developed across only a few pages which can be offered on an all-inclusive basis, including dilapidation costs". The majority of new office leases I have dealt with in the last year have been for five year terms containing a tenant's break clause and a service charge cap. All of this would have been unheard of 25 years ago.
I can see no reason why this move to flexibility and shorter leases won't continue as we move into 2019.
I would love to hear your thoughts on the above and please don't hesitate to email me at [email protected]