PwC: Commercial estate agency production to be hit by 35%

General

Commercial estate agents’ Gross Value Added, a metric of economic productivity, will be hit by 35% due to the COVID-19-induced lockdown, PwC analysis shows.

This is partially due to decreased rent collection.

Just 60% of commercial real estate rents were collected in March, leading to cash flow implications for landlords struggling to meet operating costs and honour financial commitments to banks and investors.

Another fall in collected rent is expected at the end of June.

Angus Johnston, real estate leader at PwC said: “The real estate sector undoubtedly faces some substantial short- and long-term challenges from COVID-19, simply because of its exposure to almost every other industry that has proved vulnerable to the pandemic. Consequently, we are seeing a variety of long-held assumptions being challenged.

“Decision-makers must remain rational and strategically minded. Cost-saving measures should be a constant priority as a means of staying liquid, and executives must consider every option for shoring up capital.

“In relation to standard and remote working conditions, 22% of workers directly employed in the real estate industry normally come into physically close contact with more than 20 fellow workers and 42% of real estate workers can work from home, PwC research finds.”

To help get through these difficult times PwC recommended enhancing partnerships between landlord and tenants, as well as repurposing single-use real estate.

Over the longer term, COVID-19 may well accelerate moves towards a radical rethink on commercial real estate such as greater reliance on regional hubs and ‘reverse urbanisation’.

Since the pandemic has led to radical shifts in working practices from the likes of financial services companies, which in normal circumstances would have taken years, PwC said demand for bricks and mortar office space could shrink by 25-30% as remote working moves closer towards being the norm.

PwC has seen a significant increase among occupiers and landlords going to the negotiation table to manage short and medium term cashflow issues resulting from Covid-19.

In particular, occupiers and landlords are considering innovative options to manage overheads. Key focus areas include: rent deferral, use of rental deposits; move to monthly, turnover rents, rent reductions and even regears. However, tenants must consider how long it may take to pay back any arrears accumulated as part of rent deferrals and the associated impact on their finances.

Landlords are considering how they address the running costs of buildings – electricity, air conditioning, lifts for example – given that they still need to pay these overheads while properties are vacant.

Johnston addd: “The next big milestone is hoving into view. From a corporate reporting perspective, there are a number of real estate companies with 31 March year-ends. Companies have the added challenge of accounting for the impact of falls in rental revenues and an expected drop in asset valuations alongside tricky lease accounting requirements.

“Businesses must not lose sight of environmental, social and governance (ESG) issues, even as they grapple with their financial survival. Additionally, societal shifts in response to COVID-19 will continue to heap stakeholder pressure on landlords to commit to sustainability goals.”

This post has originally been featured in Property Wire.