“Unprecedented space across the West End”: REIT Shaftesbury PLC grapples with a new reality.
By Nick Corbishley, for WOLF STREET:
In this virus crisis, owning the wrong type of real estate (e.g. brick-and-mortar retail) or real estate in the wrong type of area (e.g. apartments in neighborhoods that are heavily dependent on tourism) can have dire consequences, especially when there’s a blanket ban on evictions. UK listed landlord Shaftesbury is hugely exposed to both, and its shares have dropped 47% from their peak in October 2017.
Not only does it own a vast portfolio of all the wrong kinds of property at the wrong time (retail, leisure and hospitality), many of whose tenants stopped paying rent months ago, but almost all of its real estate — including its residential properties — are in London’s West End, which is at the epicenter of the UK’s pandemic fallout.
To weather the storm this far, Shaftesbury has raised £307 million of fresh capital in a deeply discounted rights issue. It has also increased debt by 10% and was given a string of waivers from its lenders when it was on the verge of breaking some of its debt covenants.
And it has slashed the value of its property portfolio by £700 million, or 18%, to £3.15 billion, as it reported in its 2020 end of year results, published this week. This comes just as more pandemic restrictions are set to hit London, which will put even more pressure on Shaftesbury’s tenants.
The blame for this write-down can be placed on its huge holdings of bars, restaurants, leisure and retail properties, many of which keep having to shutter during lockdowns, and the “exceptional increase” in vacant apartments, as many younger tenants have decided to work or study from family homes. By September, 137 of its 624 apartments were lying empty: a vacancy rate of 22%. There is, Shaftesbury says, “unprecedented space across the West End”:
“Typically, our 624 apartments are occupied by those seeking a base in the West End for either work or study, and are particularly popular with younger people from overseas. As a result of the first lockdown restrictions, many tenants chose to return home, leaving flats unoccupied. With the continuing uncertainty, many chose not to return to the UK for the time being and vacated permanently.”
While many international students and young workers have headed back home, fewer are arriving in London to replace them. Covid-induced lockdowns, travel restrictions and border controls have battered migration flows in most parts of the world. In the first half of 2020, the number of visas issued by OECD countries slumped by 46% compared with the same period in 2019. This is the largest drop ever recorded. In the UK, the number of visas issued in the first three quarters of 2020 slumped by around 70%, reports real estate agency Savills.
For the first time in a very long time, net migration to the UK is falling sharply. And that could have a major impact on the rental market, particularly in London. Until this year, uninterrupted net migration to the UK — even after Brexit stymied migration from the EU — played a vital role in sustaining London’s growth. Together with the “natural increase” in population (i.e. local residents having babies), it helped more than offset the flow of people out of London to cheaper, less densely populated parts of the UK, or other parts of the world. As a result, the city’s population increased by an average of 102,000 per year between 2004/05 and 2018/19, according to the UK Office for National Statistics.
For the residential property sector, uninterrupted net migration fueled higher demand, particularly in the prime rental market, which typically has a higher share of international and corporate tenants than the sales market. Nowhere is this truer than in central London. But now that the tide has turned and fewer high net worth tenants are arriving from abroad while many others are heading home, London’s prime rental market is feeling the heat.
Rents in prime central London fell by 10.5% in the year to November, pushed down by high levels of supply and lower levels of demand, according to real estate agency Knight Frank. In prime outer London, which is less built up than central London, median rents fell 9%. These were the largest drops since the global financial crisis although they are still only around half as steep as 2008/09.
The declines were less pronounced in south-west London, “where supply has not built up to the same degree.” In more central areas, the combination of a glut of properties and weaker demand has driven rents lower. In the case of London’s West End, where Shaftesbury has most of its residential properties, the glut has been exacerbated by the appearance of thousands of former short-stay apartments on the long-stay market, as landlords who used to rent to tourists on platforms such as Airbnb begin looking elsewhere for business.
“Across the West End, many landlords have been attempting to find long-term tenants,” says Shaftesbury. “This has resulted in a near-term increase in availability of apartments to let, causing downward pressure on rents.”
But Shaftesbury says: the “long-term structural shortage of accommodation” in London’s West End, which should help to ensure that the current glut is just a “short-term challenge.” That’s the hope. The landlord knows it’s in this for the long haul, particularly given its outsize exposure to the UK’s long-struggling brick-and-mortar retail sector as well as to many small and mid-size hospitality and leisure businesses, which have borne the brunt of the government’s lockdown measures.
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