Following the global pandemic of COVID-19, here is a brief update on the UK economy alongside recently announced government measures impacting the commercial property market (as at 24th March 2020).
Economic overview
With millions of people affected across the world by the COVID-19 public health emergency, the macro picture is changing constantly. New data is emerging around COVID-19 cases, central banks and governments are seeking to support their unwell citizens, pressured healthcare systems and challenged economies. On the latter, with a triple shock of supply, demand and financial markets impacted by the global pandemic, the intervention is wide-ranging and for the most part rapid.
With the unfolding events, a UK recession is unavoidable. That said the upside risks include a rapid recovery and the fiscal policy measures feeding into growth quicker than anticipated. The extent of the economic shock from COVID-19 is difficult to quantify, although there are lessons we can take from China in order to understand the impact. The latest Chinese PMI data indicates that the economic shock is more severe than the 2008 financial crisis with the services sector taking a bigger hit than manufacturing. Historic analysis shows that each index point above or below 50 adds or subtracts 0.1% from the quarterly growth rate, and the latest Chinese data would suggest that COVID-19 is likely to have halved China’s economic growth in Q1 2020. The next release (24 March) of UK PMIs will be key to understand the impact on the UK economy so far.
Turning to the UK government intervention, at the Spring Budget last week, the government announced a wide-ranging £30bn fiscal stimulus package, closely co-ordinated with strong monetary action. As the public health emergency evolves rapidly into an acute economic crisis, however, the government has been forced to expand drastically on these measures. In addition to earlier measures, as of Friday (20th) evening, all pubs, restaurants, gyms, leisure centres and cinemas across the country were requested to close. Take-aways are excluded from the new measures, and the closures will be reviewed on a monthly basis.
Shopping centres and retail outlets remain open, however many major retailers have now taken the decision to temporarily close their stores including Primark, John Lewis, Arcadia group, TK Maxx, and HMV. We expect more to follow over the coming days. Alongside the well-publicised push to grocery and online, the impact of COVID-19 is beginning to show in weekly footfall data. The footfall/sales data from the 9th to 15th March:
- Footfall declined by 7% but with notably better trends in Retail Parks (-2%) than High Street (-10%).
- Fashion was the particularly weak category, declining by 15% despite favourable weather conditions.
- Sales growth was -11.1% y-o-y across combined stores and online. Sales growth in stores was -22%.
- This survey was before the recent social distancing measures came into effect, so the next data releases will show even more of an impact.
Government measures
Chancellor Rishi Sunak said the economic intervention he announced is unprecedented but necessary. In summary, the recent changes cover:
1. Loan schemes
- £330bn of state loan guarantees to aid businesses with cash flow – some 15% of UK GDP – with the option to provide more if demand exceeds this.
- Short-term bridging finance for Corporates in the form of commercial paper bought by the Bank of England – a form of quantitative easing to directly inject liquidity into large businesses.
- Business interruption loans for SMEs of up to £5m, interest-free for 12 months (up from 6 months) – up from the £1.2m limit outlined in the Budget. We understand they will be available from today, Monday 23rd March.
- Three-month mortgage holidays for households struggling due to the virus.
2. Direct financial aid / deferments
- Cash grants of up to £25,000 for retailers and hospitality businesses under the £51,000 rateable value threshold to help with rent and wage bills.
- £3,000 grant for the smallest businesses announced last week increased to £10,000.
- Universal Credit standard allowance to be increased by £1,000 a year and working tax credit increased by same amount. Sunak also outlined help for self-employed people - suspending the minimum income floor for universal credit. That means self-employed people can now access, in full, Universal Credit at a rate equivalent to Statutory Sick Pay for employees.
- Deferring VAT for all businesses until the end of June (represents an additional £30bn injection into the economy). This means no business will pay VAT until June, and will have until the end of the financial year to repay those bills. That should help companies struggling with a cash flow crisis.
- Introduction of the coronavirus job retention scheme. Companies and organisations will be able to apply for a grant from HMRC to cover the wages of people who are not working due to coronavirus shutdowns, but who haven’t been laid off. It will cover 80% of the salaries of these retained workers, up to £2,500 per month.
- Further support for the self-employed through the tax system, with the next self-assessment payments deferred until Jan 2021 from July 2020.
- For renters nearly £1bn of support by increasing housing benefit and Universal Credit, thereby allowing the Local Housing Allowance to cover at least 30% of market rents.
3. Business rates relief
- The rateable value threshold of less than £51,000 in order to get Retail Rate Relief is to be scrapped, meaning 100% retail rates relief for all shops, cafes, drinking establishments, cinemas, live music venues, theatres, nightclubs and other “broadly similar uses” from 1 April 2020.
- This is a dramatic widening of the rates relief scheme announced in the Budget on 11 March, which was subject to EC state aid rules that capped the relief at €200,000 in any three-year period.
- The government has notified the rates relief scheme to the EU commission and unless it is found to be incompatible the relief will not be subject to specific cash limits per business.
Notes from the market
In order to give you a better feel for the day to day market on the ground we have been gathering information from all our agents and our initial feedback is reasonable considering the unprecedented situation.
We anticipated that the leasing market may suffer immediately, however, there is still positive activity, albeit around existing negotiations. For example, in office leasing we have had only one transaction terminated but we also have a new demand from Amey in Bristol. When we queried the resilience of the demand the response was that a large number of our current negotiations were based on necessity; the asset they occupy is being redeveloped, they are consolidating, or it is already part of a cost rationalisation project. We have also finalised a lease re-gear with Watson Farley Williams on 15 Appold St, EC2 of 80,000sqft from 2023 to 2026 for six months rent free.
Retail and Leisure is in a more delicate position whilst the Industrial and Logistics sector has seen little if no slowdown with new and increased demand coming from the food retailers. Transactions concluding in the last few days include Blackstone’s purchase of a portfolio from Clearbell for £120m and London Metric contracting on the funding of two pre-let trade units in Wallingford. On the multi-let side, we have good interest in an estate we are marketing in South East London suitable for redevelopment and there was very competitive bidding last week for Hermes’ sale of Perivale Park in West London with a quoting price of £160m, 4% NIY.
With social distance measures being tightened the ability to carry out our viewings is getting challenging and therefore we are using Matterport cameras (widely used in our residential business) in order to help overcome the challenge.
Across the UK and Europe we are extending bid deadlines and almost all sales that were due to be put on the market have been put on hold.
