The effect of Covid-19 on real estate, as well as the potential when the lockdown relaxes

Since the 2008 financial crisis, the UK property sector has faced numerous challenges, including three elections, each with its own set of business and investment changes and opportunities, Brexit, and the most recent issue, Covid-19, which has affected 2020 and will continue into 2021.

Covid-19 has had a significant impact on the property market. Retail and hospitality have been destroyed, and businesses around the country have been closed as employees work from home during lockdowns 1, 2, and 3.

Sectors hit hard by Covid

Student accommodation

Student housing is a massive industry in the UK, with an anticipated 2.38 million students deferring or starting university until the 2021/2022 academic year. In May 2020, Cambridge University claimed that all learning for the current academic year could be done online. Despite this, we continue to see this alternative industry attracting investors and clients, particularly lodging with personal washing facilities per student/tenant, since the necessity of personal hygiene is now clearly prioritized.

Retail

Despite the fact that many merchants have an online presence, the significant decline in footfall has proven to be too much for many firms. This has been especially true for businesses that rely on selling a large number of low-cost products while making a profit from high-street clientele.

Following the problems on the high street, numerous prominent firms, including Laura Ashley, Debenhams, and Cath Kidston, have gone into administration. Retail had seen a nice uptick in the run-up to the holiday season, but with lockdown 3 enacted later and continuing, there have been additional casualties. Many retail enterprises were failing prior to the Covid pandemic, but the pandemic has placed the proverbial nail in the coffin.

The sectors surviving

Supermarkets, warehousing, logistics, and retail parks appear to have weathered the storm, and we anticipate seeing more possibilities for investors in this area, as well as an increase in assets, becoming mixed-use.

Mortgage issues

Due to economic uncertainty, many renters stopped paying rent when the government said that tenants could not be removed during the UK shutdown. Landlords, on the other hand, still had obligations to meet.

Although many lenders were ready to evaluate debt commitments, the outcomes differed depending on the individual. Despite dwindling income, many people, particularly huge institutional investors with deep resources, continued to service their loans.

Operating during Covid – Insurance

Most organizations were forced to implement a work-from-home policy, which created more than simply operational difficulties as they attempted to assess the influence of covid on corporate strategy.

In relation to real estate, one issue we encountered was obtaining insurance estimates in a timely manner. We are accustomed to receiving insurance quotations within a 48-hour window, which is one of the most dependable cornerstones of the real estate cycle. During the pandemic, however, we experienced a delay in acquiring quotations in a timely manner because of increased strain on the insurance market; nevertheless, turnaround time has since returned to pre-Covid-19 levels. Seeking renewal terms early on is critical, and we have seen the value of being organized in this area.

Opportunities

Government intervention

The UK government acted quickly to support the property market in 2020. Changes in the lower-value residential market have been warmly welcomed. Stamp duty vacations for residential transactions have been extended in England and Northern Ireland until July 2021, with the existing threshold for residential properties set at £500,000 (tapering to £250,000 between July and September 2021). This industry has seen a rise in transaction levels, which should continue as the deadline approaches. This is also good news for residential developers, who will likely experience an uptick in demand for existing apartments, which will generate liquidity and free up reserves for future builds.

The UK budget was released on March 3, 2021, and while it was not very interesting, the important takeaway point was that the UK Government is aiming to protect employment and livelihoods while continuing to support and stimulate investment. For a more detailed study, please see our Budget 2021 Highlights.

For the cash rich investor

In 2019, there was a noteworthy drop in transactions in the UK, with many cash-rich investors waiting for the outcome of Brexit with bated breath. Many expected that with Covid, the level of commerce would stay flat; nevertheless, Savills reported that the commercial investment market finished well in Q4 2020, with £12.4 billion transacted, with total investments for the year reaching £41.8 billion. This was a 22% decrease from 2019, yet it was still a great result given the market.

For the active international investor

According to the Office for National Statistics, Hong Kong and mainland Chinese buyers invested £7.69 billion in London property in 2019, with £750 million invested especially in the City of Westminster and the Royal Borough of Kensington and Chelsea. Despite a reduction in transactions throughout 2020, the UK property market is expected to remain stable and appealing to Asian investors. “Chinese high-net-worth people (HNWIs) are currently putting 12.5 percent of their money into overseas assets, with London ranked as the most popular investment destination,” according to the Hurun Chinese Luxury Consumer Survey 2020.

Structuring options

Special Purpose Vehicles (SPVs) and Jersey Property Unit Trusts (JPUTs) have a lot of attraction when it comes to acquiring and holding UK Real Estate. JPUTs are becoming increasingly popular since they are a familiar strategy for investors, lenders, and governments, as well as being simple to set up. Jersey has a strong track record in this field, with an experienced team with extensive real estate experience.

In terms of capital gains, under the rules for non-resident collective investment vehicles (CIVs) that went into effect in April 2019, JPUTs may be constructed to make a transparency or exemption election for UK CGT purposes. Both elections have the effect of retaining the tax neutrality of JPUTs for gains, transferring gain taxes to the investor’s level.

Looking ahead – five thoughts

• The real estate industry continues to withstand crises and remains to be a generally excellent investment.
• Diversification is one of the best ways to protect yourself against unsystematic hazards, according to smart investors both inside and outside of the real estate.
• There will always be possibilities for clever, cash-rich investors. With interest rates projected to fall further, return on capital will be a significant priority, and there will be chances for long-term property investment that should generate positive returns.
• Corporate governance will continue to be a cornerstone of the real estate investment industry, and investors will want to know that their assets and funds are being housed in a reputable jurisdiction with a reputable supplier now more than ever.
• We believe that JPUTs will become more popular as a result of their flexibility and simplicity, which make them attractive solutions for holding and acquiring UK real estate.