Remote Working: a property market plague?
From peak cities to ghost towns, and from bustling streets to empty shops and offices, Covid-19 didn’t spare property markets since its outbreak. London’s property market is no exception. Considering the rise of uncertainties surrounding occupational strategies, the pandemic has thrown retail into turmoil and questioned the purpose of offices. What is the future of buildings in the midst of a pandemic?
(© Financial Times)
The glassy office stumps and shiny, smooth corporate behemoths of Canary Wharf and the City, currently sit mostly empty as a result of urges to work from home. As the UK fights a second wave of infections, visits to cafes and restaurants have plunged by approximately 30% compared to pre-pandemic levels. Although AstraZeneca saw a share rise of 2.5% after news broke out earlier this week, concerning UK hospitals told to get ready to receive the first doses of its Covid-19 vaccine from the week commencing 2nd November, the property market’s fate is still uncertain.
Companies have been fleeing the City, while the Scalpel, one of the City’s most recognisable office towers, is going up for sale for around £820m, the most expensive office building sale in London since Citigroup’s purchase of its £1.2bn Canary Wharf offices. FTSE 100 company Land Securities is also looking to sell off almost a third of its £12.8bn property portfolio, while it looks to reinvest in less struggling areas.
In effect, changes in the way with which cities are organised have been seen across the globe, while there have been speculations that the pandemic may have accelerated the move to suburbs for families, and delocalised jobs out of city centres. The pandemic has forced businesses to consider smaller units or less expensive locations, and this comes after an approximate 60% of global surveyors observing a shift in office space from urban to suburban locations.
Delocalising city centres: "smart cities"
The City of London Corporation, the governing body of most of the City financial district, is currently encouraging businesses to “re-enter the city centre” in order to help the UK’s recovery. Its efforts are focused on creating start-up hubs and affordable workplaces for small businesses. In terms of rail travel, the Corporation’s plan includes “flexible working” season tickets to be considered in order to reflect the new commuter behaviour, which is more sparse than pre-pandemic levels.
Demand for leased office spaces reportedly dropped by 59%, with a similar fall seen in investment as investors turn their focus to green projects and sustainable debt. This comes amid fears of the challenges which Brexit and increasing protectionism across the globe are leaving in their wake. The Corporation has addressed this with the proposition of encouraging IPOs, and has considered forms of “dual class” shares which have been important for tech-groups and other new equity raisings.
It has also been suggested that buildings need to be better designed for remote working practices, and to include spaces to socialise. Paris has been working on a concept of the “15-minute city”, which envisions that daily urban necessities are within a 15-minute reach on foot or bike. Conceptualiser Professor Carlos Moreno, says that multipurpose services should be developed, whereby one building can have many applications throughout the day. Similar efforts to cut down unnecessary commutes have been seen in other cities, including Buenos Aires which introduced free bike-rental schemes, and Amsterdam’s City Doughnut model aiming to reduce emissions and waste.
Property Law disputes
The pandemic has affected property in more ways than was expected, bringing about an all-encompassing impact on the day-to-day use of property of all types. One of the most significant ways with which it has been affected is legally, through the prohibition on forfeiture for rent arrears and changes to commercial rent arrears recovery, imposed by s.82 of the Coronavirus Act 2020. Even more substantially, however, the lockdown restrictions have unfortunately dictated compulsory closure of many businesses.
The UK Government has issued both statutory and non-statutory rules on how landlords and tenants, either commercial or residential, have to negotiate tenancy agreements and to express any stringent conditions under which tenants find themselves struggling to pay rent. A separate leeway, debated among practitioners, is reliance on the doctrine of frustration or a form of force majeure, to resist the obligation to pay rent. This would depend primarily on whether the agreement includes a force majeure clause, broad enough for a court to rule that a pandemic is within the clause’s scope as an ‘extraordinary event’, and a cause for frustration of the contract.
Another relevant issue at this instance, is property investment and valuation, as the case is that the unprecedented market uncertainty has caused major property investment funds to freeze their assets or sell, as seen with Land Securities previously mentioned. Rental valuations are usually undertaken through the use of a comparable valuation method, whose absence means that valuers have to find ways to transact and trade in a world where there are no direct comparables.
A suggested solution to valuation issues has been an adoption of turnover or profit-sharing rent, which may be suitable for a tenant who has been able to resume work or trading to some extent, despite the economic pitfalls brought about by the pandemic. In such a scenario, the parties will be able to share the benefit of the funds by opting for a turnover rent rather than a fixed rent reserved by the agreement. This would primarily depend on commercial negotiation. This solution does face some uncertainty, as it would require the court to determine rent by reference to a formula as opposed to the process of valuation. What is certain, however, is that payment concessions in the form of reductions and rent deferrals will be fertile sources for future disputes.
What the future of the market looks like
Realistically speaking, reshaping the structure of cities to such a fundamental level may not be viable simply because rural infrastructure cannot accommodate a mass movement of people out of cities. Predictions that high-rise buildings will shrink or disappear have been deemed unfounded. The takeaway point is that, whilst Covid-19 has disrupted the pace of working, buildings will nonetheless adapt, employ technology, and restructure their layouts to meet the demand of the people who live and work within them.