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COVID-19: future trends in residential and commercial real estate

12 May 2020

The Property group recently considered current trends in residential and commercial real estate, which you can read here. This week, we turn our attention to the future and consider the possible long term impact of the COVID-19 pandemic.

The rise of home working

As much as 45% of the UK’s working population have been working from home during the pandemic. It has also been widely publicised that the Chief Executives of some large companies have commented that busy offices may become a thing of the past.

With technology allowing for seamless home-working for some organisations, we might start to see a reduction in office space requirements, together with a rise in more flexible, short-term office sharing arrangements – perhaps where offices are shared with multiple companies to reflect lower occupational requirements.

A reduction in demand for office space may see a rise in tenants seeking to exercise break clauses or re-negotiate the terms of their leases in order to seek more favourable terms. Some tenants may look to sub-let or share occupation of work spaces to reflect their needs for less space.

Facilitating home working

A rise in home working may see developers looking to better cater for such arrangements when designing residential development schemes.

A change in planning rules which requires that home offices are included as standard in new build developments or, in fact, the market moving so that people require new builds to have home offices as standard might be a possibility. The change in working habits may see an increase in ‘live-work’ developments with properties designed to incorporate one’s personal and professional lives.

The potential reduction in office space requirements for some companies may increase the rate at which offices are converted to residential use. This is already a fast growing trend following on from the introduction of permitted development rights allowing the conversion of offices to residential use in some areas.

Reduced traffic flow caused by greater home working may see areas which had heavy traffic previously become more attractive locations for residential use.

Socially distanced travelling and working, and an escape to the country

On the other hand, the need for social distancing may see a rise in the demand of out of town offices with large car parks. With individuals looking to avoid travelling via public transport, people may prefer to live closer to work which could benefit residential premises located near to such offices.

With social distancing potentially limiting flying for some time, we may see a rise in individuals acquiring property in more rural locations within the UK. Investors may see this as an opportunity and look to acquire rural or seaside holiday accommodation.

The impact of changes in working habits and patterns on environmental initiatives, and the government’s policy of becoming carbon neutral remains to be seen. Whilst on the one hand, reduced use of public transport and more individual travelling to work by car is likely to have a negative impact; conversely, greater home-working, coupled with cleaner methods of travelling to work for some, could have a positive impact.

A move towards mixed-use

The pandemic has meant that ‘non-essential’ stores have remained closed for a number of weeks. This will inevitably impact upon retailers who are unable to trade from their premises.

Once ‘non-essential’ stores re-open, we might find that in the search for lost revenues, occupiers seek to make their commercial spaces more flexible. Prior to the pandemic, a number of retailers and other operators were already setting aside space for alternative uses to draw people into stores such as cafes, ‘click and collect’ systems and other concessions.

To some extent, a changing high street and office market may benefit some tenants – we may see a rise in rent suspension mechanisms catering for possible future pandemics. The Government may even try to legislate to provide for this as other jurisdictions have done. A number of landlords have become increasingly collaborative during the pandemic wishing to support their tenants through rent deferral or rent reduction measures. It is unclear how long that support might last.

Changing technology

Perhaps one of the biggest changes caused by the pandemic may be an acceleration towards utilising new technologies and modernising existing practices.

As set out in our recent article, HM Land Registry (HMLR) has indicated that it will allow parties to register electronic deeds. Whilst the change is being kept under review and with deeds still needing to be signed on paper in ‘wet ink’, this step may be the start of a more permanent shift towards methods such as e-signing and e-verification, removing the need for witnesses.

Indeed, HMLR reported in February that the 7,000th re-mortgage deed was signed and registered digitally, coming just four months after the 1,000th deed was registered.

This reflects trends ongoing in other parts of the UK, including Scotland and internationally such as Australia, to use entirely electronic systems throughout the conveyancing process. With registration of some documents at HMLR taking a number of months, an entirely electronic system would likely benefit from a much reduced gap between application to register transactions being lodged and registration being completed.

Opportunities

Low interest rates and changes in demand for some types of property may also spell opportunity for some investors. We might start to see some investments becoming more competitively priced or some types of properties becoming particularly sought after. For instance, the continuing rise of e-commerce may lead to a rise in warehousing demand and the need for data centres.

The future impact of the COVID-19 pandemic on residential and commercial real estate remains to be seen; however, it seems that new opportunities and changing practices are likely to emerge.

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