Economic and Market Commentary Q1 2021

By | News

Brexit news

The post-Brexit Trade and Co-operation Agreement between the UK and the EU, which had been operating provisionally since January, was formally ratified by the European Parliament at the end of April.  MEPs voted overwhelmingly for the trade deal by 660 votes to 5.

The agreement now comes into force despite reservations on both sides about fishing rights and the difficulties over Northern Ireland trade. The first of, no doubt, several stand offs occurred just a few days after the Agreement’s ratification, resulting in warships being deployed to protect the Jersey fishing fleet. Ironic, as Jersey is neither part of the UK nor in the EU, but is a Crown dependency so is defended and represented internationally by the UK government. Gunboat diplomacy at its most basic!

A reminder that the trade deal covers the trade in goods only and we await any news on future trade between the two on the likes of financial services.

Meanwhile trade between the two recovered in February after the significant drop the month before. UK exports to the EU jumped by 46% in February after January’s 42% fall. It does, though, mean than exports are still down roughly 15% over the first two months of the year. While some of the reduction in trade was down to added bureaucracy, many companies were bringing forward business ahead of the implementation of the new rules, thereby increasing trade in late 2020 at the expense of trade in the early months of this year.

The UK and India have announced a new, enhanced trade deal between the two countries, with the aim of doubling trade by 2030. And hopes of a deal with the US have risen with the American Secretary of State, Antony Blinken, suggesting that the dialogue between the countries could be revived.

Global economy

It is now just over a year since the World Health Organization declared Covid-19 a global pandemic. Many lives have been lost, economies shattered and billions spent on protecting jobs and businesses but much, too, has been achieved in the last 13 months, none more so than the rollout of several vaccines at record pace. However, many hurdles and uncertainties remain.

Infection rates and mortality rates are still stubbornly high in many countries and vaccination programmes are not progressing as quickly as desired in some countries. Yet there is much reason for optimism about the near term.

The vaccination programmes should lower future infection rates. Economies, businesses and individuals have adapted remarkably well to the constraints imposed while the massive fiscal support that many countries have employed, and are still doing, brings a more positive feel for economic activity.

We are now forecasting a stronger recovery this year and next for the global economy compared to our forecast three months ago, although the upgrade is substantially brought about by the better growth prospects for the US. We are now expecting world growth to be 6% this year and 4.4% next year, an increase of 80 and 50 basis points respectively from the January forecast.

Forecasts for the US have increased significantly since our previous report. Our expectation for growth this year has been hiked from an already strong 5.1% to our present 6.4%. Next year’s forecast has been upped by one percentage point to 3.5%.

Much of these increases are on the passing of the ‘American Recovery Plan’ act. The £1.9tr package is one the largest in US history and includes $1,400 payments to every US citizen, an extension of unemployment benefits and a child tax credit. It is estimated that this stimulus is in itself responsible for adding one percentage point to expected global growth over 2021 and 2022 combined.

Not content with seeing through the Recovery Plan, President Biden is now proposing an even bigger $2.3tr package to upgrade the country’s aged infrastructure and in tacking climate change. It is likely that will be financed through raising corporate taxes and increasing public spending and these features alone will alienate Republicans. The Democrats are divided over the magnitude of the proposals so Biden will have his work cut out to ensure this policy is passed.

It is evident that the pace of recovery is differing significantly not just across countries but also within countries. Much of these divergences can be linked to the varying pace of vaccination, although the extent of economic policy support and other structural factors (most noticeably, countries depending on tourism) are relevant. Already China has surpassed its pre-Covid level of GDP, the US is now forecast to do so later this year, but many others may take up to another two to three years to regain their pre Covid levels of activity.

Of increasing concern is the probable return of inflation. Already energy prices are increasing (oil prices have trebled over the course of the last twelve months), commodity prices are rising and while there is no prospect of inflation increasing anywhere near levels seen in the 1970s and 1980s, rates moving above the 2% levels central bankers have been targeting are likely. Some US investors are already putting money into inflation-linked government bonds, a sure sign of their concerns over the re-awakening of inflation.

The EU economy

In contrast to the booming US economy, the eurozone’s economy fell back into recession in Q1, 2021. An overall 0.6% shrinkage in the latest, January to March, quarter followed the 0.7% reduction in Q4. These last two quarters’ contractions marked the second such recession for the eurozone (defined as two successive quarterly declines in GDP) since the onset of the pandemic.

The first quarter’s data has clearly been affected by the renewed surge of Covid-19 infections and the resultant restrictions imposed but it is also evident that different countries have been experiencing differing levels of, and timings of both rising infections and tighter restrictions. To date, only Italy of the larger continental economies has plunged into recession this time, having contracted in both the last two quarters. France, Germany and Spain have managed to post growth in one or other of the last two quarters.

Germany was the most affected large economy in Q1 with a 1.7% contraction. A hike in value added tax in January following a temporary cut last year to support the economy was a key contributing factor in the decline.

Much of the pessimism about the near-term performance of the economy across continental Europe relates to the slow roll out of the vaccination programme. At the date of publishing this report, vaccines have been administered to approximately 30% of the EU population, compared to 46% in the US and 53% in the UK. Comparing the number of individuals who have received both doses, the EU (roughly 10%) trails the US (32%) and the UK (26%) (source: Johns Hopkins University).

Despite the job retention schemes that were introduced last year, unemployment increased over the summer of 2020. The unemployment rate for the euro-area peaked at 8.7% in August. It has fallen back to 8.1% or 13.2m unemployed. Over the course of the last twelve months, unemployment has increased in the euro-area by 1.6m.

The UK economy

The outlook for the UK looks brighter now than at any time during the Covid period. While activity has undoubtedly been affected by the most recent lockdown, businesses have adapted more effectively to the latest restrictions, thereby ensuring that the hit to the economy during the most recent lockdown is much less than during the initial one in Spring 2020. Then, the economy shrank by roughly 20%: contrast that with the first estimate of a 1.5% hit during the post-Christmas lockdown.

There are three main reasons for the improving confidence in the economy – the aforementioned business resilience, the rapidly improving rates of business and consumer confidence brought about by the rapid rollout and acceptance of the vaccination programme and the belief that UK consumers will soon be spending at least some of their accumulated cash savings. Continental Europeans must be looking enviously across the Channel at the speed of Britain’s vaccinations given their much discussed problems.

That is not to say that the UK is completely set fair. News that public sector borrowing hit £303bn for the year to March 2021 is a sobering reminder of the economic cost of the pandemic. That huge figure is almost £250bn higher than the total for the previous (pre-Covid) total and double that of the 2009/10 year at the height of the global financial crash. However, even that huge level of borrowing, equivalent to 14.5% of GDP, is still £24bn lower than the Office of Budget Responsibility had forecast just a few weeks earlier at the time of the Budget.

Consumer confidence hit a pandemic high in March while the re-opening of non-essential shops in April was eagerly anticipated by the frustrated shoppers. Additionally, a Deloitte survey showed that optimism amongst chief financial officers (CFOs) has risen to a record high. The same survey showed that CFOs have moved from defensive strategies to expansionary ones. Much of this optimism is down to the amount of savings the typical consumer has built up over the last twelve months. Many commentators believe that Britain is poised for a consumer boom. And judging by the lengthy queues pictured outside Primark, to name just one retailer, when it re-opened, few would bet against that expectation.

The UK’s GDP fared better than expected during Q4 2020, posting growth of 1.0% when most were anticipating contraction. The first estimate of a 1.5% contraction in Q1, encompassing a full three months of lockdown, was better than expected. And forecasts for Q2 and later are being upgraded almost daily. The IMF forecasts growth of 5.3% this year followed by 5.1% next. These have been increased by 80 and 10 bps respectively from last quarter’s report. More optimistic forecasts from Deloitte, Capital Economics and EY published in late April suggest that cumulative growth rates over this year and next could be up to 3 percentage points higher. The latter two named indicate that the UK will surpass its pre-Covid level of GDP in the second quarter of next year. As we go to print, the Bank of England has added to the good news by intimating that the UK is poised to grow by 7.25% this year, the fastest rate since comparable records began in 1949.

Further good news appeared with the news that the UK service sector, which accounts for over three-quarters of the UK economy, recorded its fastest rate of growth since October 2013 according to the widely respected IHS Markit/CIPS purchasing managers’ index for April. The latest monthly index of 61 was significantly above the previous month’s 56.3 and was the highest for over seven years. Tim Moore, economics director of IHS Markit welcomed the news, adding that the “April data illustrates that a surge in pent-up demand has started to flow through the UK economy, following the loosening of pandemic conditions”.

The feel-good factor has also manifested in a boom in house sales and house prices. House price growth usually moves in tandem with the economy; rarely do house prices rise during recessions, and if so, then not at the rate seen this year. Yet that is what has occurred. Over the last twelve months, average house prices increased by 8.2% (source: Halifax) while homeowners borrowed a record £12bn more than they repaid in April – the highest monthly amount borrowed in the 28 years that the Bank of England have been monitoring mortgage statistics. The pandemic may be responsible for some of this, with homeowners seeking to move to more appropriate houses but of equal importance are the low interest rates and the stamp duty holiday which has now been extended for home buyers in England, Wales and Northern Ireland.

Much of the optimism surrounding the UK economy is based on the expectation that, now the vaccination programme is progressing well and the government’s ‘roadmap’ out of the restrictions is seemingly on track, Britons will spend much of the savings they have accrued during the last twelve months or so. Survey data indicate that consumers have amassed between £150bn and £180bn since the start of the pandemic. Clearly not all will be spent – the Bank of England reports that consumers have been repaying non-mortgage debt in ever-increasing amounts – but retailers are eagerly awaiting a significant proportion of that being deployed to bolster retail spending.

Nevertheless, unemployment has been rising over the course of the last year, but at a somewhat lower pace than initially envisaged. At the onset of the pandemic, commentators were predicting that the unemployment rate would rise to 9%. To date, that figure looks particularly pessimistic, with 4.9% currently unemployed which is up from 4.0% prior to the pandemic. However, the test is still to come when the furlough scheme ends in September. Currently, there are 4.7m workers on furlough; not all businesses, particularly those in the hospitality industry, will emerge unscathed when restrictions are fully relaxed, and unemployment could take another lurch upward in the autumn.

The Commercial Property Market 

The commercial property market, as measured by the MSCI (IPD) Quarterly Index, returned to growth in Q1 2021 with a small but noteworthy increase in capital values of 0.64%. This quarter of growth therefore ended a nine-quarter decline in average property values, the longest in the 20-year history of the index.

But the fact that it was the All Property measure that returned to growth is only half the story. Once again, the industrial sector was the star performer with average values rising another 4.0% in the quarter. This advance was sufficient to carry the rest of the market as average office and retail valuations continue to fall. There was a noticeable reduction in the magnitude of the decline in average retail valuations – the Q1 decline of 1.51% being the lowest since Q3 2018 when retail values were just starting to decline.

And though it is tempting to believe that the worst is behind the commercial property market, and that, now the All Property valuations are moving up, future quarters will show further growth, that certainly cannot be guaranteed. Much will depend on how many businesses survive the coming months, particularly when the various job retention schemes and loans to businesses end in the autumn. Further bad news on the jobs front is certain over the course of 2021 and although the debate about the future of retailing and home working will be heard for some time, sentiment will sway with every major announcement.

Valuations of industrial assets continue to rise. The 4.0% increase in average valuations in Q1 took the last twelve-month increase to 9.3%, remarkable at a time of major economic challenge. The sector has clearly benefited from investors’ flight to safety, with logistics assets in particular being perceived as much safer investments than office or retail.

In contrast, average retail assets continue to see valuation declines. But the Q1 fall is the lowest since the third quarter of 2018. Within the retail sector, shopping centres continue to show extremely weak returns. A Q1 fall of 7.9% brought the twelve-month decline to over 28% and to a massive 55% since average valuations started their decline in 2016. There is better news about retail warehousing. A small 0.25% fall in Q1 brought the fall over the last year to a more modest 10%. Now that non-essential shops have re-opened, retail warehouses could be the retail segment where valuations are poised to recover first. Consumers, generally, remain reluctant to shop in crowded indoor malls, despite the safeguards put in place, whereas the outdoor setting of retail parks poses shoppers less issues. Add the segment’s link to house furnishings and DIY, these assets could well start performing.

While it is easy to believe that all forms of retail are suffering, supermarkets are clearly bucking the trend. An increase in average supermarket values of 1.9% took growth over the last twelve months to 5.5%. Not quite at the standard of industrial assets, but welcome nonetheless.

Tied in with the weak performance of retail assets is the continued shrinkage of the high street. The Local Data Company (LDC), which has been tracking shop openings and closures for some time, reported that 2020 was the worst year on record for closures – 17,532. And what made last year even worse was the fact that only 7,655 shops opened, the lowest number on record. Not surprisingly, the net shrinkage – the difference between the number which closed and which opened was a record high.

Emphasising how unusual last year was for retailers, city centres suffered the greatest number of closings (7.7% of the existing stock). London postcodes also fared badly with a closure rate of 6.9%. At the other end of the table, seaside towns and villages enjoyed the least number of shop closures, at 5.1% and 4.1% respectively. LDC note that this is a reversal of historical trends. For years, multiple operators have opened more sites in cities and closed units in smaller towns. As consumer and location preferences have changed over the course of the year, retailers are now preserving locations they regard having more potential in any post-pandemic environment.

Capital values across all office segments fell in Q1 but by less than 1%. This continues the robust performance of the office sector during the pandemic with average values having fallen by just 5% over the last twelve months. Perhaps surprisingly, central London offices, in particular City offices, are holding their values better than provincial ones.  Over Q1, the average values of City offices were trimmed by just 0.2% for an annual decline of 2.2%. Contrast that with the capital value performances of rest of south east and rest of UK offices which saw average declines of 0.6% and 0.8% in the quarter and 5.3% and 4.1% over the year.

In total return terms, commercial property delivered a positive return of 1.8% in the first quarter, pushing returns over the last twelve months into positive territory at 0.9%. Commercial property rarely performs during recessions, but as we have discussed before, this recession is like no other.

As can be seen in the next chart, property returns have more than held their own against other assets over the last 10 years.

Much of the reason behind commercial property’s solid returns is down to the restricted number of developments coming on stream and the huge quantitative easing programmes which have inflated real asset prices. Property has also benefited from ultra-low interest rates ensuring that the asset class delivers high levels of income, relative to other assets.

Sector issues


Long regarded as the third sector in terms of investment and investor interest, the recent outperformance of industrial assets and positivity surrounding the sector has well merited the reassessment it has undergone. Now the largest of the three sectors by some way – making up over 30% of the MSCI (IPD) Quarterly Index – it has certainly benefited from the pandemic-induced stay at home orders and shop closures.

Investment transactions hit a 20-year quarterly high in Q4 amounting to £5.6bn and the start of 2021 has also started strongly with transactions of £3.2bn, the third highest quarterly total in the last 20 years. At a time when investment in commercial property is down markedly, industrial’s investment in Q1 2021 is almost double that seen in the equivalent quarter of 2020.

This renewed demand for safe, solid income has pushed prime industrial yields down by 50 bps over the last twelve months, to 3.75%, remarkably half that of many prime retail assets. Pressure remains for further hardening of these prime industrial yields in the short term.


The key question critical to the future performance of offices is how the future use of offices will pan out. The work from home requirement has been more successful in terms of productivity than could have been imagined, but now, more than a year after the first lockdown, there are signs of workers suffering from ‘Zoom fatigue’, and many missing the company of colleagues. Many employees enjoy the greater flexibility that working from home offers: others would prefer to return to the office as their home has not proved suitable.

Many virtual board meetings will have discussed future working arrangements. There is, though, no unanimity in their deliberations. Two of the largest financial services companies, Goldman Sachs and JP Morgan have recently announced their future plans, and ensuring debate continues, they are taking different stances. On one side, Goldman has told staff to be prepared to return to the office in June. It also plans to open a new technology hub in Birmingham later this year. On the other side, JP Morgan has announced it intends to use “significantly” less office space in the future, requiring only 60 seats per 100 workers.

Irrespective of whether the Goldman or Morgan approach is the one favoured by the majority of businesses, what is clear is that work will definitely not revert back to the pre-Covid model. Surveys from several organisations have pointed to a desire by employees to a return to the office, but for just two or three days a week.

From an investment point of view, it is clear that investors will need to engage with tenants, and potential future tenants, in a way not required before. Flexibility will be the buzzword, landlords offering space that is flexible in terms of floorspace design, can be configured with all the necessary safety features, and even with greater flexibility in terms of lease length. Inserting more break clauses may not be what investors want but they may become a necessary feature for ensuring the space is let.


The performance of retail assets, on the whole, continues to disappoint. There are clearly a few bright spots, such as supermarkets and some supermarket-anchored retail parks, but for the majority of shops and shopping centres, valuations remain under downward pressure. A further 7.9% fall in average shopping centre valuations in Q1 brought the cumulative average fall over the last four years to 53%.  Investors have been reluctant to trade in this market – the few deals that have occurred recently have focussed on the potential for change of use – but there are signs that deal flow may be on the up and with a deepening pool of investors.  A test of the market will be potential sale of the Touchwood Shopping Centre in Solihull which is being marketed for £130m, an initial yield of 7.5%. A few years ago, its valuation was more than £400m.

The above valuation change calculations show only the impact of rising yields and take no account of movements in underlying rents. Factoring them in as well gives a more sobering assessment of the performance of many retail assets. However, the table below does indicate that the rate of decline in both headline and net effective rents seems to be levelling off after collapsing last summer.

Do rising bond yields point to rising property yields?

We now ponder whether property’s fortunes are about to take a hit. We mention later in the report that development completions are edging up, at a time when tenant demand remains quiet. A more fundamental concern relates to the re-emergence of inflation and the consequent increase in interest rates that would bring. While some commentators believe that inflation is a concern for only the US, yield curves around the world have been moving up in recent weeks. The equity sell-off in mid-May was a direct result of investors factoring in the return of inflation, and higher interest rates, into their portfolios.

In much the same way as the pandemic has accelerated ongoing structural changes to the economy, it has also altered the mindset of commercial property investors. Clearly, the ability to transact has been compromised during much of the last twelve months, but the pandemic has altered investors’ asset preferences. It has also impacted on investors’ ability to correctly price income, risk and obsolescence. Much of the hit to transaction volumes was down to these aspects as to the lack of stock on offer.

Changing asset thinking

The composition of the IPD Quarterly Index highlights the shift in the makeup of the index over time. Ten years ago, for example, almost half of a typical portfolio comprised retail assets, 30% were in offices and the remainder in industrials and a disparate group of ‘other’ assets such as hotels, leisure, buy-to-let residential and care homes. Fast forward five years and the transforming of the typical portfolio was underway. The most noticeable changes were a sharp reduction in retail assets, being replaced by increased allocations to industrial and ‘other’ assets. It is important to note that the move away from retail was occurring before the recent challenges to the high street manifested, and before the severe mark down of retail valuations began. Equally, the increased allocations to industrial properties preceded the major outperformance enjoyed by these assets.

Arriving at today’s typical portfolio, we see that allocations to retail properties are now barely half of what they were ten years ago, while, remarkably, the industrial asset class, historically the Cinderella of the three main sectors, is now the biggest sector in terms of valuation. That transformation was highlighted in our report three months ago when it was pointed out that the stock market listed Segro (an industrial specialist) now has a bigger market capitalisation than British Land and Land Securities (historically the largest by far) combined.

There are two different factors working on these allocation percentages. First, sales and purchases of assets out of and into the Quarterly Index and second, the relative performance of the various sectors. Clearly, the significant underperformance in valuation terms of retail assets and outperformance by industrial assets will have been a major factor in the changes to these allocation percentages. The author calculates that roughly 78% of the reduction in retail assets’ allocation can be attributed to the fall in average values, implying that 22% of the reduction has occurred because of net sales of retail asset to investors whose funds are not measured by IPD. The industrial sector allocations prove even more interesting as relative asset valuation movements explain only 61% of the sector’s increased allocation, indicating that either assets have been purchased from previous owners not measured by IPD or that investors have been developing new estates or adding to existing estates, thereby increasing their valuations.

What is certain is that investors will continue to mould their portfolios towards assets they believe will deliver the best returns. Nimble investors will seek to anticipate changes in fashion like the move into retail warehouses in the early 1980s and the more recent move into distribution and ‘last-mile’ distribution hubs. The above instances of changing sector allocations will not be the last.

Investment in commercial property across the UK amounted to £10.5bn in Q1 2021. Although this was down substantially on the levels recorded both in the previous quarter and in Q1 2020, there are signs that investor interest is on the rise. Certainly, the number of potential investors is increasing and there are clear signs that investment in some of the recently moribund retail segments is growing.

It will come as no surprise that the industrial sector amassed most transactions in the quarter – £3.2bn – the sector’s third highest quarterly total in 20 years.

Summing up

The UK commercial property market has weathered the storm remarkably well. Few commentators a year ago would have envisaged that commercial property would deliver such a resilient performance in such challenging times.

We have long believed that commercial property would continue to deliver sound performance as long as the yield argument held up. There are signs now, though, that as inflationary pressures start to build up globally, so does the prospect of rising interest rates which may feed through to rising property yields. However, we do feel that any such increase in bond yields will be modest as central bankers have indicated that policy rates will be held at current levels for some time.

Where rising interest rates may impact the commercial property market is in altering investors’ appetite for risk. Record highs in stock markets, coupled with sharp mark downs, particularly in the US, are pointing to a reawakening by investors for more risky assets. Any change in emphasis is likely to alter investors’ assessment of the risk premium for their property assets – any upwards reassessment of the risk premium deemed appropriate could well dwarf any increase in property yields brought about by rising bond yields alone. Therein lies the risk for future performance.

News flow will continue to influence one’s take on the future of the high street and the office, with the likelihood of a slimming down of the office stock needed in the future and further consolidation of town centre retail. Vacancy rates are increasing in the CBD office markets, although future development pipelines remain modest by historic standards.

 Central London offices

Take up of central London offices remains weak by historic standards although quarterly figures are gradually increasing from the lows of the second quarter of last year. Lettings in the City and West End combined in the first three months of the year amounted to 1.34m sq ft, down 34% from Q1 2020 but above that of Q4 when take up totalled 747,000 sq ft. At least lettings in Q1 are moving in the right direction, with March take up above those of January and February.

Of increasing concern to office watchers, however, is the build-up of empty office space. With limited levels of take up, completions of new developments and space being released by tenants on to the market, vacancy rates in central London are hitting levels not seen for more than a decade. There is approximately 12.3m sq ft of vacant space in the City, equating to a vacancy rate of 8.9%. Over 60% of that is in the City core where the vacancy rate is over 11%. The West End is faring marginally better – its 7.8m sq ft of empty space equating to a vacancy rate of 6.9%. One saving grace is that the majority of this empty space is of Grade A quality.

Over the course of the next 3½ years (to the end of 2024), approximately 16.6m sq ft of new development and refurbishment is due to be completed in the City.  In the West End, the equivalent figure is 12.6m sq ft. Of that total, 21% has been pre-let, implying that over 23m sq ft is being developed speculatively. While that may seem high in current markets, a return to more ‘normal’ letting markets would soon soak up this new space: average yearly take up in the City and West End office markets has exceeded 10m sq ft over the last decade. However, the scale of developments alone does not tell the full story about the extent of vacant space and its likely path in the coming months and years. Much will rest on how much space tenants feel compelled to place on the market as they themselves opt to downsize their office requirements.

Investor interest in central London offices remains firm but restrictions on viewings and the limited stock being put on the market are curtailing the actual number of transactions. Total deals in the two sub markets in Q1 amounted to £1.33bn, just over half of that transacted in the equivalent quarter twelve months previously. At least the latest quarterly deals exceeded the low points of the second and third quarters of last year. However, by way of comparison, in investment terms, Q1 2021 marked the lowest first quarter in term of transactions since 2009.

The lack of stock being offered to the market was highlighted by the fact that only one of the twelve properties sold in the City during Q1 was first marketed in that quarter.

The future of the office has already been aired in the previous section but a transaction in the West End indicates that one investor has opted to convert unused office space into 42 residential units plus ground floor retail. Bain Capital, the US investor, bought Grosvenor Gardens House in Belgravia for £80m, reputably £10m above the guide price in a competitive bid.

Capital values are still under downward pressure, but by less than fundamentals would have suggested. Despite a weak lettings market and modest levels of investor demand, average City office values fell by just 0.2% in Q1 for a twelve month fall of 2.2%. City offices though outperformed their neighbours as West End offices declined on average by 0.3% in the quarter for an annual fall of 6.6%. Last year marked the fourth successive year that average City office values outperformed their West End neighbours, a trend that has extended into 2021. Given the West End’s lower vacancy rate, lower number of developments coming on stream and the traditionally wider occupier base, that is an anomaly that could be soon reversed.

Summing up.

London office watchers will have been pleased, and no doubt a little relieved that the performance of both City and West End offices has held up so well, so far. Not only did these segments have to contend with Brexit uncertainties, they were faced with further economic uncertainty in the form of the pandemic.

Perhaps the first twelve months will prove to be the easiest period. Perhaps rising vacancy levels, the prospect of a large downward assessments of some occupiers’ requirements and the possible rising property yields will be the story of 2021 and beyond? Perhaps ….

Nonetheless, we still believe that it is premature to signal the end of the office as we know it. The debate over the future use and size of the office will continue for some time. For every major employer signalling the demise of the office, there will no doubt be similar numbers voicing their benefits. What is clear, though, is that the future office will have to offer flexibility and to that end, landlords will have to engage with their tenants (and potential future tenants) in ways not envisaged before.

Sentiment will continue to feature heavily on central London offices. Home to many of Britain’s biggest and high-profile employers, they will continue to generate and dominate press headlines.

Values have been declining for several quarters and only an optimist would suggest a rapid change in direction. With rising vacancy rates, rents will remain under downward pressure for some time, but we repeat that we do see a major hit to valuations in the coming months. Longer term, there is concern that rising bond yields could spill over to push up property yields but more of a worry, in our belief, are changes to the risk premium that investors will require for investing in bricks and mortar.


All investment and take up data and statistics from Savills, unless stated; all performance statistics from MSCI; all graphs by the author.

Stewart Cowe, May 2021

Cordatus Appoints Middle East Head

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Cordatus are delighted to appoint Bassam Kameshki as its Head of Middle East with responsibility for relationship management in the GCC region.

Bassam is a seasoned Real Estate Professional with over 13 years of diversified real estate experience, starting his professional career in project and development management then spending time in corporate real estate consultancy and real estate investment banking. Throughout his career he has worked with top regional real estate consultants and banks providing him with a rich exposure to different stakeholders and industries within the real estate sector.

Bassam was previously Head of Real Estate Asset Management at Al Salam Bank, the largest Islamic Commercial Bank in Bahrain and before that the Head of Real Estate Investments at Ibdar Bank mainly managing its international real estate portfolio between UK and USA.

Bassam has worked with several regional and international real estate partners and has an in-depth experience in advising on the right real estate investment on both; regional and international markets.

Bassam will split his time between the GCC region and London.

Bassam’s contact details are as follows:-

Bassam Kameshki

Head of Middle East

Cordatus Real Estate Limited

 M +973 (0) 3964 5400



Cordatus launches Middle East Partnership

By | News
  • The Cordatus Platform will enable direct and easy access to UK real estate for Middle East investors
  •  The Partnership aims to capitalise on enduring confidence in UK market from Gulf-based clients

Cordatus Real Estate (‘Cordatus’) and JISR Holdings have today 8th March 2021 announced the creation of a partnership to provide Middle East based clients with direct and easy access to UK real estate.

The Cordatus platform enables investors direct and easy access to UK real estate opportunities. Cordatus is a full-service provider, sourcing opportunities, structuring, and transacting deals, asset managing business plans and managing exits to maximise investor risk adjusted returns.

Having a Middle East partnership is part of Cordatus business expansion strategy to tap into new regions. The target through this partnership is for Cordatus to become the investment management partner of choice for Middle East investors seeking to invest in the UK.

Cordatus is looking to achieve total investment volumes of approximately £200m during 2021, reflecting the enduring appetite for UK commercial property assets with Middle East based investors.

Anticipated acquisitions are expected to be between £10m and £50m million , across all  sectors (office/industrial/retail and residential) focussing on opportunities that present strong and sustainable cash on cash returns that are in line with investors risk profile.

Talal Al Zain, Founder of JISR Holding said: “This new partnership will enable us to match clients’ appetite with attractive UK assets, drawing on both partners’ expertise to create a compelling proposition. The partnership’s Middle East office in Bahrain brings us to be closer to our clients and will allow us to provide an outstanding service and constant support.”

Michael Cunningham, Cordatus Director said: “We believe in long-term relationships with our investors by maintaining the highest standards of trust, ethics and governance.  We spent considerable time looking for a Middle Eastern partner to be the right fit and we are confident JISR will prove to be that partner.  Cordatus and JISR both share the same values, are run by highly-respected teams, and have proven track records that are second to none.”

The business will be run on a day-to-day basis by Cordatus directors Michael Cunningham and Gavin Munn together with the Head of Middle East, Bassam Kameshki, who will manage the relationships on the ground.

The partnership will operate from offices in London, Edinburgh and Bahrain.


Further information, contact:

Ben Copithorne / Richard Pia


T: 020 7636 7366 / /


About Cordatus Real Estate (“Cordatus”)

Established in 2006, Cordatus Real Estate is an independently owned real estate asset management specialist. Its directors have over 170 years of combined experience in the UK property market, having held senior positions in some of the UK’s largest investing institutions and property developers.

Cordatus operates out of offices in Edinburgh, the Midlands and London.  Its directors are Michael Cunningham, Mike Channing, Gavin Munn and Paul Blyth.


About JISR Holding (“JISR”)

JISR is a consultancy company, with the prime focus on Business-to-Business (B2B), providing consulting services to financial intuitions, pensions, governments, insurance companies, international fund managers, corporations, sovereign wealth funds, financial professionals, family offices, and high net-worth individuals.


Our vision is to build a leading brand in the Middle East with a core focus on Advisory, Restructuring, and Multi Family Offices (MFOs) through specialized entities and presenting innovative ideas and solutions, expertise and highest levels of integrity to our clients.


JISR firmly believes in serving our stakeholders by advising on investment strategies that delivers long-lasting returns that are achieved by a shared commitment to our investment philosophy, long-term disciplined approach and adhere to the highest standards of fiduciary responsibility that is fully geared towards our stakeholders’ interests.

Cordatus Property Trust celebrates fifth anniversary with market-beating returns

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  • Portfolio delivers a total return of 6.04% p.a. over the 5-year period against 3.78% p.a. for the index.
  • Income return of 6.42% p.a. also outperforms the index benchmark of 4.56% p.a.

The Cordatus Property Trust (CPT) – the flagship fund of Cordatus Real Estate (‘Cordatus’) – marked its fifth anniversary by significantly outperforming its index and posting impressive returns.

With the MSCI Quarterly Index results for December 2020 just released, the Trust has performed extremely well, outperforming its benchmark over every time period: 3 months, 1 year, 3 years and 5 years for the main measures of Total Return, Income Return and Capital Return.

The Trust’s portfolio delivered a total return of 6.04% p.a. over the 5-year period against 3.78% p.a. for the index.

Crucially for an income focussed fund, the income return of 6.42% p.a. over the same period was ahead of the 4.56% p.a. recorded for the index. This ranked the Trust on the 4th percentile for income returns.

Mike Channing, four time Standard & Poors performance award winning fund manager, Chief Executive of Cordatus and Fund Manager of CPT commented:

“These strong performance numbers are testament to our rigorous investment process and our hands-on, active asset management – fundamental skills that are important at all times.

“Last year one was of the most challenging in my 30 years of real estate fund management and I am pleased that Cordatus Property Trust continued to perform so well in testing market conditions.”

The Cordatus Property Trust was established in December 2015, with the objective to provide investors with returns through a diversified portfolio of core/core plus income producing assets designed to deliver income with an element of capital appreciation and with a focus on smaller lot sized assets (typically in the lot size range £3m to £17.5m).

  • The Trust currently has a portfolio valued at c. £159m, with 50 properties and 229 tenancies.
  • The property portfolio is 52% weighted to industrial assets.
  • Rent collection for 2020 averaged 96.1%.
  • During the year (2020), 26 new lettings and 20 lease renewals were completed, adding or securing over £1.45m of annual income.


Encouraged by these results, Cordatus is looking forward to building on the success of CPT over the next 5 years.


Further information, contact:

Ben Copithorne / Richard Pia


T: 020 7636 7366 / /


About Cordatus Real Estate (“Cordatus”)

Established in 2006, Cordatus Real Estate is an independently owned real estate asset management specialist. Its directors have over 140 years of combined experience in the UK property market, having held senior positions in some of the UK’s largest investing institutions and property developers.

Cordatus operates out of offices in Edinburgh, the Midlands , London and Bahrain. Its directors are Michael Cunningham, Mike Channing, Gavin Munn and Paul Blyth.

Economic and Market Commentary Q4 2020

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Brexit news

Brexit-weary Britons received an early Christmas present with the announcement that the UK and the EU had finally agreed a trade deal. Despite both sides threatening to abort the talks during the last few, frenetic weeks, the deal was finally signed by both parties on 30 December. The EU has made a habit of dragging out negotiations to the wire – recall the Greek bail out and more recently, the €750bn “Next Generation“ recovery fund – this time, both sides left it almost to the closing minutes before announcing that agreement had been reached.

While Prime Minister Johnson claims that “Brexit is done”, the reality is far from that. The deal only involves the importing and exporting of goods, and does not cover, for example, financial services, which account for a sizeable percentage of Britain’s workforce and trade with the EU. Even the Prime Minister acknowledged that the Brexit deal “perhaps does not go as far as we would like” for financial services. It is hoped that a co-operation agreement will be signed by the two parties on financial services by March. Going by past experience, any deal is unlikely to be ratified soon.   

Even though the trade deal is now in force, ensuring that goods flowing between the two regions are free of tariffs, companies have not been finding trade as frictionless as before. Bureaucracy has increased significantly resulting in delays on both sides of the channel, and evidence is appearing that some foodstuffs are having to be destroyed owing to the delays in arriving at the end user. Whether these features will be ongoing issues or merely teething troubles will only become evident in the coming weeks and months.

Over the course of 2020, Britain signed more than 50 trade deals with countries outside the EU, but one that failed to be completed was one with the United States. It had been anticipated that signing a trade deal with the Trump administration would have been easier and quicker than with any future president, but no deal emerged. President Biden no doubt has far more in his in tray at present than concerning himself with the relatively small matter of a trade deal with Britain.

One potential trade deal that may be announced soon is that with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) which is the recently agreed trade agreement between 11 Pacific rim countries. While the population of these countries totals 500 million, or roughly 10% larger than the EU, they account for less than 9% of Britain’s trade.


Global economy

Following on from somewhat higher rates of activity in the second half of last year, our expectation for global growth in 2020 has been raised by 90 basis points from our -4.4% forecast three months ago to -3.5%. This outturn would have been even better had many countries not been in some form of lockdown in Q4, caused by a further wave of Covid-19 infections and more worryingly, new and more easily transmittable strains of the virus.

However, 2021 began with the news that vaccines have been approved for general use and that the vaccination rollout is progressing in many countries. This fact alone has brought about improvements to our global activity forecast for this year, increased by 30 bps from October’s 5.2%. The outlook for next year is unchanged at 4.2%. The availability of the vaccines is the prime reason behind the belief that downside risks to our forecasts are now lower than for some time.

The improvements to the forecasts are not evenly spread; much will depend on the ability of countries to source and pay for the vaccine. Aside from the boost given by the vaccination programme, the upgrades reflect government spending measures, particularly in the US and Japan, which see cumulative upgrades of 160 bps and 150 bps respectively over 2021 and 2022 combined. In contrast, Europe’s fortunes have been reduced by a total of 50 bps over this year and next. 

Q3 growth mostly surprised on the upside. Private consumption rebounded strongly but in contrast, apart from in China, investment has been slower to improve. The momentum behind the strong Q3 numbers, however, has not been carried on to Q4. Rising numbers of cases in many countries plus the consequent lockdowns imposed have stalled, at best, this recovery. With lockdowns still in place, there are fears that many countries will face a further recession, reporting declines in GDP in both the final quarter of 2020 and the first quarter of 2021.

Vaccinations aside, a lot still has to be done on the economic front to limit permanent damage from the severe contraction in activity last year. The two-year forecasts assume that the vaccination programmes are rolled out by mid-2021 for most advanced countries and by the second half of 2022 for most other countries. Together with improved testing and tracing practices, transmission of the virus will be brought under control everywhere at low levels within two years. This year sees further huge fiscal support in the US, Japan and the EU, while fiscal deficits should decline in most countries as revenues increase and government spending falls with the recovery. Additionally, financial conditions are expected to remain supportive for some time.

The Q4 GDP reporting season got off to an upbeat start with the US announcing a better than expected annualised growth of 4%, although that was down significantly from the rebound seen in the previous quarter. Over 2020 as a whole, the US economy shrank by 3.4%, the sharpest fall since 1946. It is likely that the US will have performed better than most other major economies in both Q4 and over 2020.

With the Democrats now in control of both houses in Congress, President Biden appears to have a clear mandate to implement fresh policies and indeed to reverse some of his predecessors’. Raising the minimum wage and paying higher Social Security payments are key policy changes which should drive household consumption, the “Buy American” laws will seek to protect and boost jobs, while the US pledges to re-engage with the Paris Climate Accord.


The EU economy

Most countries performed better economically than anticipated during Q2 and Q3 enabling us to up our forecast of activity for 2020 as a whole by 110 bps. However, lockdown measures across many continental countries towards the end of last year has prompted a downward reassessment of activity in Q4 and the start of 2021 and has resulted in trimming our full year estimate for the year by 1 percentage point to +4.2%. These changes confirm that the single currency bloc will suffer a              permanent loss of output resulting from the pandemic. Indications currently suggest that the eurozone will not recover its pre-Covid level until late 2022 or early 2023. This recovery, though, will not be uniform across the 19-nation bloc, nor uniform across sectors.

Policy responses by the European Central Bank and individual countries have certainly cushioned the impact of the pandemic, though the 7% – 8% estimated contraction for 2020 is by far the worst annual figure in the short life of the eurozone. Individual countries have seen a wide divergence in activity, ranging from the almost euphoric outcome of just a 5% contraction in Germany to the much greater losses experienced in the more tourism-focussed countries of southern Europe.

The eurozone has the luxury of ultra-low interest rates. Consequently, member countries and the European Central Bank enjoy low borrowing costs which is a major benefit at a time when debt levels for many are at elevated levels. With inflation expectations also muted, monetary policy can remain supportive until the recovery takes hold.


Despite the job retention schemes that were introduced last year, unemployment has been rising across the continent. The number unemployed in the euro area at the end of the year has increased to 13.67 million or 8.3% of the working age population, an increase of 1.5 million in the year. The similar figures for the EU as a whole are 16 million unemployed, up almost 2 million in the year or a rate of 7.5%.


The UK economy

Economic modelling at the outset of the pandemic last year anticipated a deep but relatively short downturn in the first half of the year followed by a strong rebound in the second half. While the downturn generally fell in line with expectations, the recovery has somewhat stalled owing to the emergence of further, more easily transmitted forms of the disease. Activity in the UK failed to build upon a solid recovery in the third quarter, with strict lockdowns being imposed before and after Christmas resulting in yet more pain for retailers and the likely creation of a double dip recession. 

2021 is going to be a battle between the fast-spreading virus and the optimism that the Covid-19 vaccine rollout will allow life to get back to some sort of normality. But the current downturn indicates that activity will not regain its pre pandemic level until sometime in 2022. The arrival of the vaccine has at least limited further downside risks but we are anticipating that the economy will still only claw back roughly 40% of the estimated 10% 2020 decline this year. 

The travails of the retail sector have been a regular feature of this report over the last few years … and with good reason. Retailers suffered their worst annual sales performance on record last year, driven by a slump in demand for fashion and homeware products. While food sales were 5.4% ahead of the 2019 amount, non-food sales fell about 5%, according to the British Retail Consortium.

It therefore came as no surprise that job losses in the retail industry hit another high last year with a loss of almost 180,000 jobs (source: Centre for Retail Research). There is not expected to be any respite this year either, with the trade body expecting another 200,000 jobs to disappear. But while the retail sector has been at the forefront of job losses during the pandemic, it is important to realise that it is not only the retail industry undergoing rationalisation. The fact that unemployment has risen by over 400,000 (source: ONS) since the beginning of the crisis highlights that it is not just retailers that are suffering.

Many leisure and hospitality ventures are struggling to cope with enforced closure and apart from the retail industry already mentioned, it is these sectors of the economy which are likely to suffer most in terms of job losses. Some pain has been deferred owing to the furlough schemes and other help provided by the government, but many of these, previously vibrant parts of the local and town communities, will be lost for ever.

The new year could not have begun with more sobering news that two of the high streets’ most established retailers, the Arcadia Group (owner of brands such as Top Shop and Top Man) and department store Debenhams are both going to disappear from town centres. Both companies fell into administration last year, and although the Debenhams brand and brands within the Arcadia stable have been bought by online specialists ASOS and Boohoo, neither purchaser intends keeping a high street presence. This means that over 25,000 jobs will be lost in the closure of these previously former giants of the high street.

On the brighter side, there is certainly evidence that there is a significant weight of money waiting to be unleashed into the economy when the tide turns, the vaccination programme completes and the economy returns to some sort of normality. With Britons having had limited spending options over the last year, many families will have accumulated greater than usual savings thereby offering some hope to the beleaguered retail sector. Some estimates put the amount of excess savings over the last nine months at £150bn, a figure that could grow to £200bn by April. But averages do hide the darker side to the effects of the pandemic. The Office for National Statistics has indicated that almost 9 million people had to borrow more money last year just to “get by”. Many of these individuals were young and low earners, both groups suffering more from furloughing and job losses.

In economic terms, Britain suffered a particularly bad 2020 compared to many of its peers. Reasons given by commentators for the country’s underperformance include the greater weight of the country’s service sector and Brexit uncertainties. But a report from Capital Economics argues that the UK population fell by 1.4m workers last year – primarily on account of migrants electing to return home (for either virus, job or Brexit-related reasons). Whether these workers return could have a significant bearing on activity this year. 


Market Commentary

Average property values fell again in Q4, extending the period of decline to nine quarters, the longest in the 20-year history of the MSCI/IDP Quarterly Index. The 0.25% decline was the lowest quarterly reduction in that nine-quarter period and continues the trend of reducing declines which prompts hope that capital values will soon start rising.


With the two previous quarterly results showing a narrowing of the extent of capital value falls, there was some expectation that Q4 could see a reversal of this lengthy negative trend, the possibility of which being heightened when both the recent MSCI Monthly Index and the CBRE Index showed gains.

However, unlike the period of declining values around the global financial crash (GFC) when average values in each of the three sectors fell by roughly similar amounts, the magnitude of the valuation falls this time has been more sector specific. The polarisation of valuations of, on the one hand, industrial assets, and on the other, retail assets has been stark. The Q4 quarterly total return differential between the total returns of the best and worst sectors, i.e. industrial and retail, is the widest ever recorded.

Since September 2018 (the recent peak in market valuations), average industrial values have actually risen by almost 6%. By contrast, average retail values have fallen by a massive 23%. Indeed, the collapse in retail values started much earlier, its peak in terms of average valuations being the end of 2017, and the fall in average retails since then has been 30%. Shopping centres have fared even worse, having fallen on average by 50% over that period. Given the continued bad news emanating from the retail industry, there is no sign of a quick end to the constant falling valuations.

Offices, historically the most volatile sector, have been the model of consistency recently. Over the last two years, average values have been trimmed by just 5%. Central London offices have shown divergent paths, City offices down just 1% and West End by 6% over that period. Given both Brexit and pandemic issues, either of which could have proved detrimental to both sentiment and occupier demand, these performance figures are particularly robust. 

In total return terms, commercial property delivered a positive return of 0.9% in the fourth quarter and a return of -2.3% over 2020 as a whole. Both figures can be deemed more than acceptable, given the unprecedented shocks to the economy during the year. As can be seen in the next chart, property returns have more than held their own against other assets over the last 10 years. Much of the reason behind commercial property’s solid returns are down to the huge quantitative easing programmes which has inflated real asset prices and the absence of major development recently.

Q4 benefited from a reversal of recent trends by the return of yield hardening in provincial offices and in the industrial sector, although yields still continued their outward yield drift in the retail sector. Yield hardening was noticeably prevalent in industrials, accounting for most of the sector’s average capital value growth of 5.2% in the quarter.

The lower rate of decline in average property valuations is in stark contrast to the events of a decade ago. During the GFC, and over an eight-quarter period, average commercial property valuations fell by 44%; this time, average valuations have fallen by 10% over the last nine quarters.


The changing UK commercial property landscape is clearly illustrated by the real estate investment trust (REIT) market. Currently the largest stock by a large margin is Segro with a market capitalisation of over £11bn – a valuation greater than the combined market valuations of Land Securities and British Land, two previous giants, but whose market caps have tumbled in line with the valuations of their assets. Segro, a specialist in the industrial market, has seen its valuation soar as online shopping has taken off and the values of its predominantly industrial assets have risen. It is reckoned that every extra £1bn spent online last year required almost 1m sq ft of distribution space. And in another chilling reminder of the power and reach of Amazon, the internet giant leased a quarter of the 50m sq ft of warehouse space let in the UK last year.

The outperformance of industrial properties plus strong demand for industrial units have pushed Segro shares to a premium rating (over its net asset value), compared to the deep discounts of the more general trusts. 

In contrast to the positivity surrounding industrial assets, retail assets continue their downward trend. 2020 was the worst year for job losses in more than a quarter of a century with an estimated 176,000 retail jobs lost and this year has begun with equally grim news. As mentioned earlier, the collapse of Debenhams and Arcadia will see their shops disappear from the high street, adding yet more vacant space to struggling town centres, and making another 25,000 workers unemployed. In terms of finding new tenants for these soon to be vacant units, it is worrying that a quarter of the former BHS stores, which went bust over four years ago, are still lying empty (source: Local Data Company, August 2020). At this stage of the evolution of the retailing landscape, it is difficult to see where alternative retailing tenants will come from. Landlords and local authorities alike are going to need the wisdom of Solomon to address this thorny issue.

A fall of 3.7% in the last quarter of the year brought the full year valuation fall of average retail assets to 17% while shopping centres fared even worse with a quarterly decline of 8.6% and a full year fall of 30%. The retail market has been hammered by the various lockdown restrictions but Covid was not the sole reason for the collapse in valuations. The industry has been undergoing a structural change for several years, the Covid crisis merely accelerating these changes.

The shopping centre market has been particularly hard hit. Some are questioning the future of these city-centre and edge of town centres. Not only have values been declining, so have investment transactions. Over the course of 2020, only £340m of shopping centres were traded (source: Knight Frank), around one-tenth of the long-term annual average. Of that, only five centres valued above £20m were traded. However, active players in this market appear to be some local authorities who are prepared to bring forward regeneration plans or bring ownership from cash-starved owners to the wider benefit of their towns.


Investment in commercial property fell 20% last year to £42.4bn, the third consecutive year of decline. While Covid-related restrictions on viewing were certainly one factor in the decline, one must not lose sight of the fact that, with few alternative investment opportunities presenting themselves, many institutions are reluctant to part with property assets without first having sourced a replacement. Hence the supply of suitable product on the market fell.

Office and retail sector investment was down sharply last year but demand for industrial product increased 11% from its 2019 total to £8.5bn, equating to 20% of total transactions.


Summing up.  The property market enters 2021 in remarkably good shape given everything that has been thrown at it. Against other asset classes, it remains good value and with the rate of decline in property valuations perhaps now nearing its conclusion, the prospects for much of the market looks favourable. We believe that commercial property will remain good value as long as interest rates remain low and the supply/demand equation remains in equilibrium.

Continued growth of online sales is the key driver for industrial/distribution units; rental growth is likely to continue as long as supply remains limited.

In contrast, the retail sector is likely to see continued pain. There seems to be no end to the bad news coming out of the high street but hopefully, once the vaccination programme is rolled out in the coming months, retailers will benefit from the spending spree that many economists predict.

It is the office sector which still divides opinion. On the one hand, rising investor interest and take up point to better times ahead: on the other, rising vacancies, development completions and tenant released space suggest caution. Add to that the uncertainty about the future place of the office in the post-Covid world.


Central London offices

Central London office take up increased over the closing months of the year, but, overall, 2020 turned out to be the worst for almost 20 years. The City take up in the first, pre-Covid quarter of 2020 exceeded the amount leased in the following three quarters. The West End did not fare much better in terms of the amount let, although a healthier closing quarter took the annual amount let to 1.70m sq ft. City and West End take up combined totalled 4.33m sq ft in the year, both sub markets down 60% from the total of the previous year.

Indeed, Knight Frank state that the office leasing activity over the whole of London recorded its two lowest quarters ever in Q3 and Q4. But London is not alone in posting poor letting figures. Both Paris and New York also recorded their two lowest ever quarters for letting last year, albeit having let more space than London in these quarters.


In terms of investment transactions in Q4, City investment of £2.14bn was down by a third on Q4 2019. Meanwhile the West End recorded its highest Q4 investment, £2.87bn, since 2014. It was notable that Land Securities and British Land took the opportunity to sell major London offices in Q4 for a combined £960m. Both purchasers were overseas investors.


Across all the London office markets, total transactions amounted to £12.1bn, down 13% from 2019’s total and the lowest annual figure since 2009. It is notable that, despite all the Covid-related difficulties in the market, overseas investors remain positive on UK property in general and central London offices in particular. Over the last decade, the overseas share of transactions in this market has remained in a relatively tight band around 66%, peaking at 75% in 2017 and falling to a low of 64% in 2015. The share that overseas buyers accounted for in 2020 was 66%, down 1 percentage point from the 2019 figure.


Investors remain risk averse, preferring properties offering secure, long dated income. Over 80% of City purchases fell into the ‘core’ or ‘core plus’ category last year, while equivalent figures for the West End are similar.

With lettings down, it comes as no surprise that vacancy levels are increasing. Voids increased sharply over the course of 2020, the City’s vacancy rate of 9.3% being the highest in eight years while it is ten years since the West End last recorded a vacancy rate as high as 5.75%. The one positive aspect of the lengthy restrictions in force for much of last year was the fact that many developments are facing delays to completion.


Developments alone do not tell the full story about the extent of vacant space. Across central London, the amount of tenant released space available for sub-leasing increased substantially over the course of 2020. At the start of the year, tenant controlled vacant space was estimated at 1.7m sq ft. By the end of the year, it had risen to over 6.2m sq ft, accounting for over a third of all vacant space. With many businesses facing unprecedented uncertainty over their futures, it can be expected that this space will continue to grow in the coming months as some occupiers seek to reduce costs. 

Capital values are still under downward pressure, but Q4 saw a marked divergence in the rate of decline in the sub markets. While average City offices fell in value by just 0.4%, for a 2.2% fall in the year, average West End offices had a much greater fall of 3.5% in the quarter, and a 7.0% fall over 2020. Last year marked the fourth successive year that average City office values outperformed their West End neighbours. Given the West End’s lower vacancy rate and the traditionally wider occupier base, that is an anomaly that could be soon reversed. 

Summing up, the central London office market has weathered the recent storms relatively well. Although take-up and investment transactions are picking up, they remain well below recent years’ figures. Of more concern, though, in the short term, is the growing amount of vacant space, which is made worse by the flood of tenant space coming to the market. Central London offices, like all office markets, are still in the midst of the debate over the future role of offices versus home working. In the short term, further weakness in valuations is likely.

Finally, it is worth considering the wider picture. Most commercial property markets, and certainly those in western Europe, are experiencing not dissimilar features such as lower take up and curtailed development. Huge quantitative easing policies have lowered interest rates around the globe, consequently leading to low property yields. Under that scenario, London offices look favourably priced against its European peers. According to BNP Paribas, prime West End yields, despite standing at a near all-time low, are now higher than those of Paris, Frankfurt and Milan.


All investment and take up data and statistics from Savills, unless stated; all performance statistics from MSCI; all graphs by the author.

Stewart Cowe, February 2021




Electric Vehicles & Real Estate

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Article by Cordatus Director, Gavin Munn

25th January 2021

Elon Musk might be on to something…

I have been watching the technological progress of electrical vehicles (EV’s) for a while now, initially with a view to getting a car myself but increasingly I have been considering the real estate implications of this impending electric revolution.

Public interest and media coverage has really increased in the last year and it is now clear that we are at a tipping point where their relevance and take up are starting to be significant.

2020 saw a dramatic rise in EV sales with an increase of 184% over 2019. That compares to hybrids (+56%), petrol (-21%) and diesel (-38%). In fact, pure electric models accounted for 6.7% of all new car registrations in 2020. Looking further ahead, projections by National Grid suggest that the UK stock of EVs could reach between 10.6 million by 2030 and could rise as high as 36 million by 2040. That is a mighty increase given there are only 375,000 plug in cars and 10,300 plug-in vans currently on the road.

This all presents one very obvious stumbling block which is charging. At the moment 80% of EV owners charge their cars at home, for which you need a drive. Outside cities some 40% of homes do not have a drive and within cities that percentage is very much higher. At the moment the public charging network is woefully inadequate and although there has been a significant improvement in recent years there are still only 35,000 public charging points in the UK. This shortage is a significant infrastructure challenge for stakeholders but it is also one that the real estate industry can contribute to and benefit from. Destination charging at supermarkets, retail parks, cinemas, offices, gyms all could offer a charging opportunity whilst we work or play and with an average daily drive distance of 25km cars only need a quick top up.

Wholesale EV take up in the commercial sector will take a bit longer due to vehicle size but once it starts to get traction the infrastructure and real estate implications will be huge. When cities ban internal combustion engines (ICE’s), as they surely will, then logistics fleets will need to be charged in depots. This will put huge demands on the grid which means that understanding tenants capacity requirements and the viability of delivery will be critical . The real estate implications of EV’s are huge across all sectors and therefore the investors and developers that are early to recognise and address the opportunity and issues that this revolution presents will reap the rewards.

At Cordatus we are very focussed on global trends in technology, sustainability, demographics and urbanisation both in the asset management of our existing portfolio and whilst considering new acquisitions. Electric vehicles straddle many of these trends and like many of them will be accelerated by the after effects of Covid-19. We will certainly be focussing on the opportunities that they present for both our business and our investors.

So whilst Elon might be on to something big, he needs the help of the real estate industry to make it something truly transformational….

Opportunistic sale in Bristol

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In its latest deal Cordatus Property Trust (CPT) has sold the leasehold interest of Unit 7 Newbridge Industrial Estate, Bristol, a standalone industrial unit in a core industrial location.

The unit which extends to approximately 30,500 sqft was acquired in 2015 as part of a larger holding, was sold to a private investor for £2.075m / £68.00 psf CV.

The property located at the Newbridge Trading Estate in the St Philips area of Bristol, an established industrial area approximately 2 miles east of the City Centre, provides a detached triple bay warehouse with two storey office accommodation which had recently been refurbished following the previous tenant moving out. Not only did the sale to an owner occupier reduce the fund’s void shortfalls but also achieved a price significantly ahead of valuation and apportioned book cost – a double win.

Andrew Murray of Cordatus said: “Despite the ongoing issues surrounding the current pandemic and uncertainty amongst occupiers, the sale illustrates that for good quality stock with strong underlying fundamentals there will always be demand.”

CPT was represented in the transaction by CBRE and CMS with the refurbishment works project managed by CS2 Surveyors.

Renewal success in Milton Keynes

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Despite the current uncertainties due to COVID and Brexit, Cordatus Property Trust (CPT) are delighted to have just completed the renewal of four leases at their Carters Yard Industrial Estate in Milton Keynes.

Carters Yard is a development of 24 business / distribution units of varying sizes and the estate was bought in 2015 as part of the Lion Portfolio. The four renewals account for approximately 20% of the estate by area and follow on from the recent letting of Units 28 & 29.

Andrew Murray of Cordatus said: “These deals are a real boost to the Milton Keynes economy and we are delighted that the tenants have decided to remain on the estate. At Cordatus we continue to work closely with our tenants through these uncertain times and secure the best possible outcomes for all parties. These renewals are consistent with our core aim to protect income for our investors.”

CPT were represented by Louch Shacklock and CMS.

Not all retail is dying

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With all the negative headlines it would be easy to believe that the retail sector has died and that the physical store is a thing of the past. However, at Lisnagelvin, Derry/Londonderry, 2020 has been a busy year with lettings and renewals despite the obvious hurdles of COVID and Brexit.


At the centre there have been a number of new openings and expansions including McAtamney’s flagship store, Toytown, and Poundland which have created over 60 jobs including construction works which is a real positive for the city. The centre has also welcomed Amazon Lockers and is one of the first centres in Northern Ireland to be chosen for them.


Andrew Murray of Cordatus said: “There is no doubt that the retail sector is facing challenging times and needs to adapt and reposition itself to current trends. At Lisnagelvin through working closely with the tenants and landlord investment in order to achieve this, we are delighted to have welcomed five new tenants to the centre as well as numerous renewals with both McAtamney’s and Poundland expanding in the centre.”


The landlord was advised by Cushman & Wakefield, Pinsent Masons and Johnston Houston.


Lisnagelvin Shopping Centre is a neighbourhood centre of 111,540 sqft with 487 free car parking spaces and anchored by a 24-hour Tesco superstore and petrol filling station and was bought by Cordatus Property Trust (CPT) in 2016.

Economic and Market Commentary – Q3 2020

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Brexit news


Just a few days ago, Prime Minister Johnson apparently ended negotiations with the EU saying that there was no point carrying on unless the EU fundamentally changed its position. Perhaps a week is indeed a long time in politics as talks are very much back on and it appears that the UK and the EU could now be inching towards a deal. It has been reported that compromises from both sides on one of the thorny issues, that of post-Brexit fishing rights, could kick start discussions that would enable a trade deal to be unveiled before the year end.

The compromise would allow the UK to regain control of its territorial waters while also allowing EU fishing boats access. It is reported that the protagonists are looking at a plan which uses the concept of ‘zonal attachment’ where quotas are determined by the amount of fish stocks on either side’s waters. If a deal is reached, it would allow British fishermen to catch significantly more fish than at present and it would also defer the decision on the amount of the EU quota until after the wider trade deal is signed.

Talks are continuing with both sides accepting that the clock is ticking with some tough negotiations still to come. But the fact that discussions are still ongoing is a welcome development.

Meanwhile the UK and Japan have signed a trade agreement, Britain’s first post-Brexit trade deal. It means that virtually all of Britain’s exports will be tariff free while tariffs of Japanese cars entering Britain will be tariff-free from 2026.

While symbolic, the trade agreement would boost trade between the two countries by about £15 bn – adding less than 0.1 percentage point to the UK’s GDP – a tiny fraction of the trade that could be lost were no deal with the EU be agreed.


Global economy

It is fair to say that we are all experiencing difficult times, perhaps the most challenging since the Second World War; challenges where economic policy alone is insufficient. Many countries are experiencing a ‘second wave’ of Covid-19 cases, testing has been ramped up across the globe and social restrictions are being reimposed; still the death toll rises, still we await a suitable vaccine and governmental spending still spirals relentlessly upward.

Despite this gloomy environment, economic forecasts for 2020 are generally better than those predicted three months ago, following on from slightly less damaging contractions in the second quarter, but these minor upgrades have been counterbalanced by the expectation of a weaker recovery next year.

The relatively stronger Q2 outturn has been helped by the sizeable, quick and unprecedented fiscal, monetary and regulatory responses that has helped maintain disposable income for many affected households and protected cash flow for businesses. Collectively, these actions have so far prevented a recurrence of the financial meltdown of 2008-10. How governments are going to pay for this largesse is a tetchy question for the future. At least, the probability of low interest rates for a longer period together with the anticipated recovery next year alleviates the debt service burdens in many countries.

While the worst in terms of economic fallout is now, hopefully, behind us, the pace of recovery is likely to be lengthy, uneven and uncertain. Many countries are now facing a second wave of infections, once again putting severe strain on health services and any hope that the illness and its economic impact would be confined to 2020 now seems unlikely. Indeed, the number of new cases in many countries is currently rising at a faster rate than during the initial February – April phase although one has to bear in mind the number being tested now is significantly greater than six or seven months ago. This has caused a further downgrading of the economic outlook for many countries in the near term compared to pre-pandemic expectations. 



Our global economic forecast for 2020 has improved from -4.9% three months ago to -4.4% with upgrades to our forecasts for the US (by 3.7 percentage points), the eurozone (by 1.9 pp) and Japan (0.5 pp). All these upgrades are followed by slight downgrades next year. The risks remain very much skewed to the downside, most visibly seen in the sudden falls in global stock markets at the end of October when markets started factoring in a much worse economic consequence of the ‘second wave’.

After a partial recovery next year, global growth is forecast to gradually slow to around 3.5% pa in the medium term, somewhat short of the c 4.0% – 4.5% pa anticipated pre-pandemic. The reduction in the growth outlook will hit average living standards and the pandemic will reverse the near three decades of progress in reducing global poverty and will increase inequality, particularly hitting those working outside the formal safety nets. 

Nonetheless, the interminable US circus called the election is over – bar the shouting! – for another four years. While not quite overshadowed by Covid news, the election of Jon Biden (subject to potential litigation by Trump) is likely to change many of Trump’s policies, including tax increases for both high earners and corporations. Only time will tell, as will dissecting ex-President Trump’s tenure. Staying in America, though with global ramifications, the Federal Reserve indicated that there would be no interest rate increases until at least the end of 2023 adding that it would not tighten policy until inflation has been “moderately above” 2% “for some time”. Its Chair, Jerome Powell said the statement meant “rates will remain highly accommodative until the economy is far along its recovery from the Covid-19 pandemic”.




The EU economy

The eurozone and EU recorded a stronger than anticipated recovery in the third quarter, the former posting growth of 12.7%, fully three percentage points ahead of expectations. This followed two quarters of decline which in total had left the zone 15% lower than at the start of the year. But any hope that the single currency bloc could build on this recovery in Q4 have been derailed by new lockdowns or circuit breakers which have been imposed in many countries in recent weeks.

Expectations for Q4 are being reduced with some commentators believing that a double dip – i.e. further contractions in activity – could be on the cards. Certainly, the restrictions re-introduced will have an adverse effect but a slowdown was already being seen. France’s finance minister is on record saying that the French economy will contract by a worse than expected 11% this year. Meanwhile, German consumers are tightening their belts. The boost from the cut in VAT is fading, pushing retail sales down 2.2% in September. 


Meanwhile, owing to the job retention schemes that were introduced earlier this year as Covid-19 became established, the rise in unemployment has so far been limited. Over the third quarter, the euro area’s unemployment rate was 8.3%, 30 bps higher than that three months earlier and 80 bps above the rate 12 months ago.

Inflation turned negative in August and at -0.3% in September remains well below the ECB’s target of ‘close to but below 2 percent’. Oil prices have been particularly weak recently as markets consider the financial and economic impact of further lockdowns, and they are likely to remain weak for the foreseeable future putting further downward pressure on inflation.

Our forecasts have been increased slightly for this year but reduced by a small amount next year for most countries. However, with many European countries now in the midst of a tightening of restrictions, there is a real fear that Q4 growth (and consequently for 2020 as a whole) will be significantly lower than that expected.





The UK economy

A 20% contraction in the second quarter was not part of Boris Johnson’s manifesto a year ago, but then, the terms coronavirus and Covid-19 had not yet become part of everyday conversation. Not only was the fall the worst quarterly result in UK history, it was the worst performance by any G7 country, and one of the worst posted in the developed world. With the UK’s record on the number of Covid-related cases also one of the worst, it has not been a 2020 to remember for the government.

Predictably, Q3 saw a major recovery, but momentum has since stalled as the virus reasserts itself in the community forcing significant tightening of the economy. The magnitude of the recovery remains uncertain, with the first, flash estimate expected later in the November. Expectations for Q3 growth range from 13% to 18%.  Hopes for Q4 have been lowered in line with other European countries and another contraction cannot be ruled out. It is likely that the full year outcome will be a decline of around 10%, by far the worst outcome seen since the immediate aftermath of the Great War but similar to other countries in the continent.

Meanwhile, the furlough scheme, which pays workers affected by the forced, temporary closure of businesses, and which was due to end on 31 October and be replaced by a less generous job support scheme, has been extended until March 2021, meaning that the scheme will have been in place for 12 months. Around 9.6 million workers have benefited from the scheme since its start this March at a cost to taxpayers of £40bn.

Unemployment has also risen to its highest level in over three years as the pandemic continues to hit the economy. The unemployment rate increased to 4.5% in the quarter, up from 4.1% in the previous quarter. Similarly, the number of redundancies in the last three months increased to 227,000, the highest since 2009 in the midst of the financial crash. These statistics are not as bad as were initially feared at the start of the hiatus when talk of an increase to an unemployment rate of 9% was rife. But with the second wave of infections now upon us, further and significant job losses are likely.

With the pandemic no nearer to its conclusion and its financial impact no nearer being finalised, the Chancellor has taken the sensible step of postponing this year’s Autumn Budget. ‘… now is not the right time to outline long-term plans – people want to see us focused on the here and now,’ the Treasury said. That means that the difficult decisions on how the cost of fighting Covid is to be financed has been deferred into the new year.

On the day lockdown restrictions were imposed in England, the Bank of England announced another £150bn of quantitative easing, taking the total employed this year to £895m, dwarfing the amounts utilised in the past decade. The Bank acted as it was concerned that the UK would enter another downturn as the new restriction hinder the recovery. Interest rates were kept at their record low levels, 0.1%.



This second period of lockdown in England should not be as damaging to the economy as the spring one was for several reasons: presently, the period of lockdown indicated is only four weeks as opposed to the uncertain period when the first lockdown was announced in March; unlike the previous period, manufacturing, construction, real estate, schools and universities, nurseries and garden centres are allowed to open. The four-week lockdown is due to end on 2 December, and that therefore affords the possibility of a re-opening in the run-up to Christmas which would obviously be of major benefit to retailers. Additionally, lessons have been learned both from communications and working from home. All that should point to a less damaging impact to the economy in December than what happened earlier in the year.

Summing up, the economy has made a strong recovery in Q3 but momentum has slowed in recent weeks pointing to a weak Q4. As the Covid case numbers remain elevated, a fresh lockdown across much of the UK will further hinder growth while it is likely that the economy will not reach its pre-Covid level until 2022. Meanwhile, the cost to the Treasury keeps mounting. How the Chancellor tells us how we are paying for the unprecedented measures introduced over the last eight months has been deferred until next year. 



Market Commentary

A 1% fall in average property values over Q3 took the cumulative fall in values to 10%. This period of declining property values started two years ago, making this decline of similar length of time to that over which values fell during the global financial crash. Perhaps the same duration, but thankfully, not the same magnitude, as average values fell a whopping 44% a decade ago. But whereas property values started to rise two years after the decline started in 2007, there are few signs of respite in the current collapse. However, the 1% fall in Q3 was significantly less severe than in the two previous quarters and gives hope to the belief that the end of the decline may be near. Much will depend on the strength of the economy in the coming months.



While most areas of the market are witnessing falls, it is the retail sector which is bearing the brunt. Once again, the shopping centre segment was the worst performing over the quarter, falling in value by 6.6% for a cumulative fall of 24% this year alone. The fate of standard shops was not much better, seeing a 3% fall in the quarter. Neither segment was helped by the news that the number of shop units closing in the first six months of the year hit an all-time high with 6,001 closures, up from 3,509 in the corresponding period last year.

It is not all doom and gloom on the high street, though. There are a few bright spots too, as there is a steady flow of openings. For example, consumers are rediscovering their local retailers while there has been a mini boom in takeaway and pizza delivery shops. Additionally, there is rising demand for services such as tradesmen’s outlets, building products and locksmiths. These new units, welcome though they are, however, are dwarfed by the numbers closing. There is still a lot of pain to come for the retail sector; a lot of corporate restructuring and many more redundancies to come, despite the Chancellor’s laudable efforts on job protection.

From a performance measurement point of view, institutions, which are most likely to favour investment in city centre retailing units, are often not represented in neighbourhood shops and parades and so it is debateable whether valuation upticks in these local shops will work its way into the MSCI (IPD) indices.

One of the success stories this year has been the growth of internet sales, though that of course has had negative implications for the high street. As retailers have been augmenting their online presence, there has been significant growth in retailer interest in distribution warehouses and also investment by these retailers in the final part of the supply chain known as the ‘last mile’. This is fuelling growth in these smaller distribution warehouses in suitable locations nearer the customer. It is no surprise that these parts of the commercial property market are presently the strongest. Average industrial values bucked the recent trend in Q3, posting an increase of 1.0%, the only sector to show an increase, with the sector back in growth after six months of decline. 



From success stories to failure! Business recovery firm Begbies Traynor claims that there are now over half a million firms in ‘significant distress’. Needless to say, the biggest increases in struggling companies came in food retailers, construction and real estate and property sectors. And that number could be even higher if courts were operating normally, as the number of county court judgments and winding up provisions are lower as winding-up petitions for Covid-related debts are currently banned. That has led to concerns that, once these restrictions are lifted and Government support is removed, the number of firms going bust could surge as a ‘brutal reality check’ hits the UK economy. Many of these companies are surviving only through the availability of Government loans and employee cost subsidies, but once these come to an end, there will be little hope for many of them.

Investment transactions were notably higher in Q3 than in the depressed second quarter. Total deals in the country totalled £6.5bn (source: LSH), almost 50% higher than in Q2 but still 50% lower than the five year quarterly average. September accounted for over 40% of Q3 deals, perhaps indicating that the market is now beginning to pick up after weakness over the spring and summer.

Surprisingly, investment activity was driven not by London but by provincial deals, where the volume of deals was down only 28% from its quarterly average. This compares with a 50% reduction in central London office transactions. Offices were the most favoured sector in the quarter where deals amounted to £2bn were recorded: industrial properties also remained in vogue with deals worth £1.9bn transacted in the three months while retail assets were again out of favour with less than £1bn transacted for the fourth quarter in a row.

Although activity was relatively muted in London, it was home to the quarter’s largest transaction, the purchase of Morgan Stanley’s headquarters in Cabot Square, Canary Wharf for £380m. The purchaser was a Hong Kong-based REIT. The next two biggest transactions in the quarter were also offices – Sun Ventures purchase of 1 New Oxford Street for £174m and Tristan Capital’s £120m purchase of Reading International Business Park. As debate continues as to the future of offices in the post-Covid world, these purchases are major statements by the purchasing funds concerned. 

Summing up, the property market enters the winter season in much better shape than at any time since the outbreak of the pandemic earlier this year. Take-up and investment statistics remain dull, but are on an upward trend following extremely weak figures over the summer. Anecdotal evidence of the amount of lettings and investment transactions also points to an improvement in the final quarter of the year. But perhaps the most positive feature to emerge over the course of Q3 was the sudden slowdown in the rate at which average property values are declining. The rate of decline in property values had been accelerating for four successive quarters. The outturn for Q3 was significantly better than those recorded over the previous two quarters and gives a glimmer of hope that the two-year decline in property values may be near an end. Whether that is the case will largely depend on the state of the economy, whose outlook is as confusing as ever. Not only do we have potential lockdown-induced weakness but we also have the ‘deal / no-deal’ discussions with the EU. It will be an interesting couple of months. 

Central London offices

With the economy struggling to regain momentum, it comes as no surprise that take up of central London office space currently remains muted, although Q3 was stronger than in the almost moribund second quarter. Vacancy rates have been rising over the course of the summer for three reasons: below average take up, the fact that new Q1 2021 completions now come into the equation and from a significant increase in tenant marketed space.



In the City and West End combined, the amount of tenant released space available for sub-leasing increased by over 1m sq ft to almost 4.9m sq ft over the course of the quarter. This amount is three times that available before lockdown and now accounts for one-third of the total amount of space available in central London. With many businesses facing unprecedented uncertainty over their futures, it can be expected that this space will continue to grow in the coming months. 

Overall take up is recovering from its earlier slumbers with September figures for the City and West End showing welcome improvement from recent months. That said, though, cumulative take up for both Q3 and for the first nine months of the year remain well below recent comparables. At just over 500,000 sq ft, the City take up in Q3 was the lowest Q3 for 16 years, while the West End take up, at just under 400,000 sq ft, was the lowest third quarter lettings this century. 



Confidence in the investment market is also slowly but surely improving. Total investment deals across the two central London office markets in Q3 amounted to £1.27bn, double that of the previous quarter, although it is still way below pre-Covid levels. The acquisition of 1 New Oxford Street at a yield of 4.2% has already been referred to, but that was eclipsed as the largest deal in the quarter by the purchase of the Morgan Stanley headquarters in Canary Wharf for £380m. Both strong statements as to the future of the office post Covid.



Capital values are still under downward pressure, but the rate of decline in Q3 was less than in the two previous quarters. Average City values fell 0.5% while those in the West End by 1.1%, bringing the cumulative fall this year to 1.8% in the City and 3.6% in the West End. Rents, though, are faltering. Prime City rents, at £77 per square foot in September are 4.6% lower than three months earlier and 12% lower than 12months ago. West End prime rents remain around £100 psf.

Summing up, the central London office market has weathered the recent storms relatively well.  Take-up and investment transactions are recovering though still well short of recent levels. While many of the statistics are moving in the right direction, the increasing amount of tenant marketed space is a worrying development. Central London offices are still vulnerable to the failure of the Brexit discussions and to the debate over the future role of offices versus home working. In the short term, further weakness in rents is likely.

All investment and take up data and statistics from Savills, unless stated; all performance statistics from MSCI; all graphs by the author.

Stewart Cowe, November 2020