London Property

Commercial Market Challenges, Savvy First-Time Buyers, MDR Relief - 7th Nov Property Bulletin

Commercial Market Challenges, Savvy First-Time Buyers, MDR Relief – 7th Nov Property Bulletin

Blog Post No. 209

Commercial Market Challenges, Savvy First-Time Buyers, MDR Relief – 7th Nov Property Bulletin


The British commercial property industry, valued at £1.3 trillion, is facing a precipitous decline, transitioning from a gold standard to a precarious situation akin to a house of cards.

This transformation is exemplified by the struggles of GlaxoSmithKline (GSK), which constructed a lavish headquarters in 2002, only to find itself unable to recover even a quarter of the construction cost when attempting to sell the property for £70m to £80m in 2021. This situation is fueling concerns of a severe commercial property market crash, with offices being particularly vulnerable.

The market is contending with several challenges, including shifts in post-pandemic working patterns, rising interest rates, and the substantial costs associated with new green regulations. These factors are driving experts to predict a significant correction in property prices, with office buildings expected to bear the brunt of the impact.

Analysts like Citi’s Aaron Guy have made bearish predictions, with forecasts of a nearly 40% drop in London office values over the next two to three years, along with a nearly 50% decrease in rents. While office values have already fallen in London, there is still a significant gap between perceived asset values and what buyers are willing to pay.

The situation is reminiscent of the 2008 financial crisis when credit agencies failed to identify flaws in mortgage-backed securities. Currently, valuations in the UK commercial property market are determined through discussions between owners, auditors, and valuation agents. Many property owners are hoping to ride out the correction until values rebound, as substantial writedowns can have a domino effect, affecting banks’ loan books.

Signs of trouble in the commercial property market began with property funds being gated as large asset managers restricted withdrawals, and this trend has continued. A lack of investor interest, coupled with rising interest rates and falling property values, has led to dwindling investment in the sector.

The shift in working patterns post-pandemic, with declining office occupancy rates and companies seeking proximity to major transport hubs, has further exposed the vulnerability of office spaces. Large companies are prepared to pay a premium to be located near these hubs, potentially leading to the abandonment of less desirable areas.

Additionally, the credit markets face challenges as lending tightens, with a substantial amount of commercial real estate loans needing refinancing. Potential valuation falls and reduced lending volumes could result in a funding gap of as much as £37 billion.

While the Bank of England suggests that a commercial property downturn may not threaten financial stability as it did in the US housing crisis, the impact will still be widespread. UK pension funds have investments in property assets ranging from 2% to 6%, with a significant proportion of the country’s pension fund market tied up in real estate.

Furthermore, the ownership of commercial property in the UK is highly fragmented, with many middle-class individuals investing in the market, partly due to changes in buy-to-let taxation. Large companies are looking to shed these properties from their balance sheets by selling them to pension buyout vehicles, potentially leading to a significant sell-off. However, few of these insurers are keen on holding illiquid commercial real estate assets.

In summary, the British commercial property industry, once a gold standard, now faces a precarious situation with various factors converging to threaten a significant market correction, especially impacting office spaces. The potential cascading effect of a commercial property market crash raises concerns for the broader economy, financial institutions, and pension funds, as well as the potential complications arising from pension buyouts.

Eva Lockwood, an eight-year-old from West Yorkshire, is on a mission to save for her first home. 

In the face of the soaring cost of homeownership, Eva has already started setting aside money for a property deposit. Her aspirations for her first home include a location near B&M, Smyths Toys, and Burger King. To help with her mortgage payments, Eva plans to have a spare room that she can rent out.

Eva earns her money by assisting with household chores, like cleaning and tidying. She could make £1 for a light bedroom tidy, and up to £5 for more extensive cleaning tasks. Additionally, she saves money she receives as gifts during Christmas and her birthday.

With the help of her mother, Rebecca Lockwood, Eva also sells items like pencil cases on online platforms like Vinted and eBay, further boosting her savings. Depending on the chores she has completed, Eva typically earns between £25 and £50 per month. She allocates her earnings into three pots: a quarter for immediate spending, another quarter for short-term savings, and the remaining half for long-term savings.

For her long-term savings, Eva is building up a deposit for a home. Currently, she has around £3,000 in cash savings, and she also holds a stocks and shares ISA with approximately £1,200. Stocks and shares ISAs are tax-free savings accounts where individuals can invest in various financial instruments. Her family uses a prepaid debit card and financial education app called GoHenry to help her budget her money.

Rebecca Lockwood, a dance teacher and Eva’s mother, emphasizes the importance of financial education from an early age. The family aims to teach their children about the value of money and making it work for them. Their financial planning includes teaching Eva about investing her money, and they occasionally sit down to review how her investments are performing.

Eva’s long-term savings goal is to amass enough for a home deposit, ideally by the time she turns 19. As they navigate the world of finance, Eva and her family use tools and apps like GoHenry to ensure she understands how to manage money effectively.

This story aligns with a trend suggesting that children are increasingly interested in saving and investing, with many now planning for significant life milestones like buying a home or taking driving lessons. In an era of rising living costs, financial literacy is becoming more critical for younger generations to secure their financial futures.

By 2030, the City of London is poised to undergo a significant transformation, with plans for 11 new skyscrapers set to reshape the financial district’s skyline.

These towers will create a more ordered and grid-like formation, in contrast to the recent scattered and incoherent development along the Thames. The City of London Corporation reports that 500,000 square meters of new office space are either approved or under construction, with an additional 500,000 square meters proposed, equivalent to 70 football pitches. However, this skyline overhaul has garnered criticism due to concerns about the environmental impact of glass-clad buildings during a climate crisis and the potential oversupply of commercial space in a period of reduced demand. London’s central area currently has an 8.5% office vacancy rate. While the density of skyscrapers is increasing, the City’s development direction has been ongoing for decades, featuring a mix of modernist and historical architecture.

The City of London Corporation has made the decision to sell the freehold of its South Molton Street Estate, located in London’s Mayfair. The estate, spanning approximately 46,250 square feet, consists of 19 freehold assets directly managed by the Corporation and 34 freeholds subject to long leasehold interests. The proceeds generated from this sale will be reinvested by the City of London Corporation, with a specific focus on advancing its Climate Action targets within its investment property portfolio.

To facilitate the sale of the South Molton Street estate, the City of London Corporation has enlisted the services of CBRE. This estate is renowned for its high-end retail offerings, featuring prominent brands along its thoroughfare in Mayfair.

The future of Multiple Dwellings Relief (MDR) in the property industry is under examination as changes in the property market continue to evolve.

MDR, introduced in 2011, aimed to stimulate the property market by reducing Stamp Duty Land Tax (SDLT) on the purchase of multiple residential properties. It calculates SDLT based on the average property price rather than the total, providing significant tax advantages, especially for large-scale residential developments.

Critics argue that MDR benefits wealthy investors and worsens the housing affordability crisis. To address these concerns, the government is considering reforms. One proposal is to introduce a cap on the relief amount, limiting its benefits for large-scale investors. This move could make the property market more accessible to smaller investors and first-time buyers, but it faces opposition from industry stakeholders who fear reduced investment and slower development.

Another reform under consideration is stricter eligibility criteria, confining MDR to properties in actual use as dwellings at the time of purchase. This prevents relief claims on properties intended for commercial use or redevelopment.

MDR’s future will also be influenced by property market trends. The rise of the build-to-rent sector may increase MDR demand. However, remote working could reduce the need for city-center apartments, impacting large-scale developments and MDR use.

In conclusion, the future of MDR remains uncertain, but it will have significant implications for the property industry. Investors and developers will need to adapt to potential changes in profitability, investment strategies, and project feasibility as they await government decisions on MDR’s future. The fate of MDR hangs in the balance as policymakers seek a balance between housing affordability and stimulating investment.

A recent survey by HSBC UK indicates that 68% of UK first-time buyers are now more confident about entering the property market compared to the beginning of 2023.

Key reasons for their optimism include cheaper homeownership compared to renting , independence , financial security , and providing for their family . Only 11% see their first home as an investment. The survey also found that nearly three-quarters of homebuyers are seeking properties that require renovation to reduce initial costs. Savings accounts and ISAs are the most common methods for saving a deposit. The research highlights the positive shift in attitudes toward the housing market, despite the challenges of the current economic environment.

In some cities, reasons for buying vary, with “independence” being a top motivator in London, Manchester, and Newcastle, while “financial security” leads in Liverpool.


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