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

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  • 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

By | News

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

Economic and Market Commentary – Q2 2020

By | News

Brexit news

Little progress has been made in recent months. Presently, there remains a few key sticking points between the protagonists, such as European access to the UK’s fishing waters and ensuring a level playing field is maintained. But given the UK’s threat to walk away from talks if no progress was visible by the end of June, the fact that discussions are still ongoing can only be regarded as encouraging.

Businesses on both sides of the Channel have been preparing for a ‘no deal’ outcome for some time and such preparations have been rendered even more complex given the equally pressing Covid related matters that are currently taking much of their attention.

Meanwhile, Michel Barnier, the EU’s chief Brexit negotiator, has issued a dossier of preparations EU businesses and citizens need to make before the end of the year.  The report advises all businesses to revisit the existing plans for a ‘no deal’ Brexit.

It has to repeated that the risks surrounding economic forecasts – predominantly on the downside -are particularly heightened at present, both on account of Brexit and Covid related matters. The threat of a ‘second wave’ of infections, or even a resumption of greater lockdown measures renders any forecasting extremely challenging.

Global economy

We closed our commentary of the global economy three months ago with the comments of the head of the IMF, Kristalina Georgieva, that her organisation’s then forecasts may well be “too optimistic”. That certainly was so, with the latest forecasts for this year and next being cut virtually across the board.

Forecasts for global growth have been cut from the -3.0% expected in April 2020 to -4.9% now while next year’s growth has been reduced from 5.8% to 5.4%.  These reductions are the result of a greater than expected hit to activity over the first half of 2020 and a slower path of recovery.

It is sobering to realise that cumulative global growth over 2020 and 2021 together is now forecast to be over six percentage points worse than forecasts made six months ago, before the coronavirus took hold. For all bar a few countries, first quarter growth was generally poorer than expected while flash data point to a more severe contraction in Q2 than had initially been anticipated – China being the exception as most of the country had emerged from lockdown by early April.

The economic crisis caused by the pandemic is often described as “unique” and in many ways it is. But in some ways, this crisis has triggered different patterns. Normally, recessions are characterised by consumers using savings to tide themselves over, meaning that consumption is less affected than investment. This time, though, both consumption and output have dropped significantly. Businesses have reduced investment owing to sharp falls in demand, interruptions to supply chains and uncertainties of future prospects. This all leads to a broad-based demand shock which compounds the near-term supply disruption caused by lockdown.

One of the key restraints to economic activity is the fact that mobility remains depressed. Lockdowns generally were at their most intense and widespread in the period from mid-March to mid-May. As economies have gradually reopened, mobility has picked up in some areas but it still remains low compared to pre-virus levels. Data from mobile phone tracking, for example, indicate that activity in retail, recreation and workplaces remains depressed in most countries, although it appears to be returning to normal levels in some areas.

Unsurprisingly, the sharp decline in activity comes with a huge hit to the global labour market. While some countries have contained the fallout with effective short-term pay schemes, the International Labour Organization have estimated that the global decline in work hours in the first quarter of this year compared to the previous quarter is equivalent to the loss of 130 million full-time jobs: the decline in the second quarter could be equivalent to more than 300 million full-time jobs.

However, there is some light at the end of the Covid tunnel. Financial conditions have eased recently and coupled with temporary furlough measures and financial support to firms, these have prevented even greater economic pain. This has been accompanied by further quantitative easing measures (and through the central banks of some emerging markets initiating QE programmes for the first time) which have improved liquidity provision and crucially limited the rise in borrowing costs.

The EU economy

Once again, Brexit negotiations have been largely overshadowed by politicians and public alike as Covid-19 dominated the headlines. Predictably, economic activity plummeted in the second quarter of the year, pushing many countries into a technical recession. For the EU as a whole, the first estimate for the Q2 GDP was a contraction of 11.9%, following on from Q1’s downwardly revised decline of 3.2%.

Like many other regions, the sharp decline in the EU economy so far has been deeper than originally expected and the forecast bounce back in the second half of the year is likely to be less pronounced. The EU is unlikely to return to its pre-Covid activity level until 2022 at the earliest and for some countries, that prospect is even further into the future.

The sorry state of European economies

Tied in with the deep cuts in economic activity has been news of the EU’s ground-breaking €750 bn package to assist countries in addressing the economic malaise caused by the virus. Agreeing the deal, though, was not straightforward. There were deep divisions between the likely beneficiaries of the package – particularly Italy and Spain – and the so-called ‘frugal four’ of the Netherlands, Austria, Sweden and Denmark. The rift between the ‘spendthrift southerners’ and the ‘frugal four’ was not simply one of money but one of potential European fiscal integration to which the four are opposed. At times heated, agreement was finally reached after four days of negotiations when a compromise was struck – limiting the amount of grants to €390 bn with the rest being provided as low-interest loans. The four also retained their budget rebates. The proposal now reverts to individual countries for ratification.

Our 2020 forecast for the EU as a whole has been cut by 2.7 percentage points from those of three months ago. The recovery next year has been raised by 1.3 percentage points, implying an overall decline since the last report of 1.4% over this year and next. Nations which are expected to fare worse over the two-year period, namely, France, Italy and Spain, have seen their forecasts cut the most.

The UK economy

The bond markets have taken the strain across the globe as countries have raised billions in order to pay for the damage to the economies wreaked by hurricane Covid-19. And few countries have borrowed quite as much as the UK. By the end of June, the cost of the outbreak had soared to £190 bn, that figure inflated by a staggering £55 bn borrowed in the month of May alone. Economists are factoring in a total borrowing requirement of around £300 bn this financial year. Before the crisis erupted, the government deficit was expected to be a mere £55 bn.

The Office for National Statistics (ONS) stated that at the end of June, the ratio of debt to GDP had increased to 100%, the highest since 1961, although it recognised that calculations are “subject to greater than usual uncertainty”.

It is still unclear how the economy performed in Q2. The monthly estimates of activity indicate that activity plummeted by 20% in April (the first full month of lockdown) with a modest 1.8% uptick in May as some lockdown measures were relaxed. The jury is at present out on how June (and hence the quarter) performed. While much hard data continues to suggest a weak recovery, some point to a much stronger pickup. Prominent amongst the optimists is the Bank of England economist, Andy Haldane, who said in late July that the economy had already recouped about half the 25% decline it saw in March and April.

Roughly 9.5 million workers (one-third of the total private sector workforce) were furloughed at the outbreak. Businesses were required to contribute to the furloughing scheme from August and the scheme itself is due to cease completely in October. At that point, not all these workers will be re-employed, despite the further incentives to do so offered by the government. Economists believe that the unemployment rate, so far steady at around 4% could well then rise to around 9% – a rate not seen since the early 1990s. The coming months, therefore, will be crucial for companies and employees alike.

One key factor taking up much of corporate decision makers’ time is that of cash conservation. Even though some businesses have managed to get through the working from home mandate with apparent few difficulties, and even for those companies whose trading was largely unaffected, that has been achieved at some cost. Remote working does not come cheap, particularly given the little notice companies had when the restrictions were announced. Couple that with uncertain prospects in the coming months, it is not surprising that this topic is so critical.

Arguably, companies were in a better financial state at the start of the lockdown than for many years. Corporate debt levels were at a 20-year low, at around 80% of GDP at the start of the year yet even that was concerning to many. In a recent (Q2) Deloitte survey of UK chief financial officers, a net balance of 40% thought that the balance sheets of UK corporates were too highly geared – the highest percentage for a decade.

Almost half of companies have less than six months’ cash reserves

This desire to conserve cash was also demonstrated by the government’s decision to halt dividend payments by the banks, to ensure that they remain as fully reserved as possible during the crisis. Given the interim results of the banking sector announced recently, showing a huge rise in the provision for bad debts, that dictate was very prescient.

But the banks are not the only sector to be feeling the economic chill. Research from the Link Group shows that the likely total amount of dividends paid by UK plc could be halved this year, and Link do not believe that there is any prospect of last year’s record amount of £111 bn paid out to shareholders being reached again until 2026 at the earliest.

 Market Commentary

A further fall in average All Property capital values over the second quarter of 2.95% was not unexpected and this decline takes the cumulative fall over the last seven quarters to 8.8%.  Already, these valuation hits are the longest since the global financial crash, where values tumbled on average by 44% over a two-year spell, but so far, the current rate of decline is less marked.  While there is undoubtedly more softening in valuations to come, we reiterate that we are not in the midst of the same financial meltdown that we witnessed a decade ago – the more limited use of debt now and consequential less pressing need for owners to sell being one reason. The fact that the economy is expected to return to its pre-crash level quicker than during the GFC is another important factor.

Where valuations are under the greatest downward pressure remains the retail sector. The travails of retailers and the retail property sector have been constant themes in this report over the last couple of years and we foresee valuation declines for many retail assets for some time to come. The restructuring of the retail industry has been ongoing for the best part of a decade and lockdown has merely accelerated these trends. Since lockdown measures were eased, a raft of retailers has announced plans to reduce the size of their estates – even well-run companies such as John Lewis have decided to close some stores – and many more chains will announce plans to trim their portfolios in the coming months.

The worst performing segment – in property performance terms – has been shopping centres: a feature neatly captured by the fate of INTU, one of the largest real estate investment trusts (REITs) and the owner of some of the largest shopping centres in the UK.  Just 30 months ago, its share price was 250p and it had entered discussions with Hammerson with a view to merging their businesses. That merger was eventually called off and since then, INTU’s share price has continued to fall just as the values of its assets have fallen. It formally went into administration in June with its shares suspended – and probably worthless.

The one bright spark in the retail has been the performance of supermarkets. While average capital values there too have fallen this quarter, it was by a minor 0.1%. As well as the buoyant trading many enjoyed during the full lockdown phase, these assets have benefited from their long long leases.

Rents are falling in all three sectors, but while retail is seeing marked reductions in rents and a sharp rise in yields, the twin effects are less damaging in the office and retail sectors.  Average All Property capital values fell 2.95% in Q2 for a 5.5% decline over the first six months. Capital falls for the market as a whole have been on a downward trend now for seven quarters, during which average capital values have fallen 8.8%.

These market falls have been exacerbated by the collapse in the value of many retail assets which have fallen by 11% on average this year and by no less than 25% over the last 2½ years. The performance of offices and industrials has been better: both sectors have only so far experienced six months of falling values amounting to just 2.8% and 1.5% respectively.

With the second quarter encompassing the lockdown in its entirety, it is not surprising that the number of investment transactions have fallen substantially. March had seen a distinct slowing from the healthy number in the two previous months, but April and May, in particular was badly affected by investors’ reticence. Although June’s figure was better, deals over the quarter totalled a mere £5.1bn, by far the weakest quarter since the GFC. Bad though this quarter’s figure is, it is worth recalling that during the GFC, total deals then were significantly lower.

Overseas investors still remain keen on UK property

With many businesses in difficulty – whether from a lack of customers, as with many retailers, or those struggling with problematic computer systems that make working from home extremely challenging, landlords have been in the firing line when it comes to rent collection. A survey by Remit Consulting on behalf of Capital Economics has been conducting an analysis of leases across the UK since 2009. Currently, the sample covers 125,000 leases, in total paying an annual rent of £9.4bn.

As would have been expected, rent collection statistics this year are down substantially from previous years.  Whereas almost 80% of rent payable was received on time last year, the equivalent figures for 2020 are much worse: 36% for the March due date and 33% for June. By 21 days after the due date, these collection statistics had improved to virtually 100% during 2019 but only to 67% for March. For the June period, the amount collected within 21 days had dipped to only 59%. Office renters were most timely about payment; almost 81% of the due rent had been collected within 21 days of the June date.  Contrast that with 48% or retailers and 33% of leisure users.

This loss of income – whether permanent or temporary we will have to wait and see – did have an impact on the IPD property market performance in Q2. Normally, when capital values fall, the income return statistic rises (as income return is calculated as [rental income received / capital value] and as the denominator falls, the answer increases). However, for Q2, such was the loss to the numerator (ie the rental income) that the division resulted in a lower answer. This could be a feature over the rest of the year as more and more companies seek to halt or reduce their rental commitments. Even so, commercial property still generates a higher income return than many competing assets, such as bonds and equities.

Summing up, the UK commercial property market has had a rough time since Covid-19 caused so many changes to normal life. Lettings and investment turnover and rent collection statistics are all down.  Industry has a major fight to cope with the ending of the furlough scheme and unemployment is certain to increase in the coming months. It is not an ideal backdrop in which commercial property will thrive. However, looking at the bright side, the economy is expected to recover relatively quickly, there is little development underway, and much of what there is has been deferred owing to working restrictions. Social distancing policies and other health issues in offices are likely to lead to more space requirements than less. But the risks remain elevated – coming from the threat of a second epidemic on the health side – but arguably, the greater risk comes from the chance of greater global trade protectionism and the possibility of a no deal Brexit. Irrespective of these risks, the retail sector will still face challenging times as its restructuring continues apace.

Central London offices

With poor levels of both take up and transactions over Q2, it is easy to regard the central London office market as one in crisis. In take up terms last quarter, both the City of London and West End segments posted the lowest quarterly lettings in a decade, while the value of deals completed has also collapsed. City investment transactions recorded the lowest three months in a quarter of a century, while the West End was buoyed by a much better June at least. In that market, there were only three lettings over 50,000 sq ft in the first six months of the year, two of which occurred in June.

Despite these exceptionally poor statistics, there has been a noticeable improvement in sentiment as we progressed through the quarter. June’s take up figures were markedly better than both those for April and May while it was a not dissimilar story with investment transactions.

Given the economic backdrop and these muted property market statistics, there was no surprise that central London office values fell again in the quarter. But the Q2 falls, of 1.1% in the City and 1.8% in the West End, were better than many had feared. Indeed, the overall fall in the All Property values was a relatively modest 2.95%. Central London office values have now been falling for six months, and it is likely that values will continue slipping until the economy picks up. It is worth emphasising that economic activity is not expected to fully recover to pre-Covid levels until 2022 at the earliest so property returns are not likely to bounce back strongly soon.

Very few letting deals in central London offices in Q2

There was little encouragement in the number and value of investment deals in Q2.  Both the City and the West End saw minimal deals in the quarter. Indeed, the volume in both markets were reminiscent of the dark days during the financial crash a decade ago. But perhaps we are turning the corner.

As well as more engagement between buyers and sellers in the quarter, and a substantial rise in properties under offer, the early signs for Q3 are encouraging.  Transactions in both the City and West End totalled over £850m: the City’s £445m in July was 5% bigger than that recorded over the whole of Q2 while the monthly total for the West End’s (£411m) exceed the combined total for the previous four months.

Investment transactions were negligible in Q2 but better times ahead …

Summing up, at first glance, take up and investment transactions were disappointing over the second quarter of the year. However, forward looking indicators such as the number of properties under offer and potential lettings are heading back up, a feature highlighted in July statistics.  Having said that, however, and despite relatively optimistic claims from letting agents and investors, the value of central London offices will remain under pressure for some time until both Covid-19 and Brexit are safely behind us.

All investment and take up statistics from Savills, unless stated; all performance statistics from MSCI.

Stewart Cowe, August 2020