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29 December 2020 By Aimee Donnellan

Sprucing up a run-down property is a quick way to add value. That’s what landlords are banking on in 2021, as Amazon.com buys defunct malls and offices become flats. It could boost valuations in the $33 trillion global commercial property market. Even so, assets will still be worth less than five years ago.

Demand for office space has plummeted to a record low, according to London’s Great Portland Estates. The landlord’s stock declined 25% since the beginning of 2020 as companies from Twitter to BP and PwC embrace a future where working from home is the norm. Shopping malls are in a worse predicament. Retail titans like Arcadia, owner of Britain’s Topshop, and J.C. Penney in the United States have collapsed amid the pandemic. The e-commerce boom that has eviscerated the high street is only likely to intensify – Moody’s reckons the proportion of online sales will leap to 25% by 2025 from around 15%.

Luckily, Amazon is crying out for warehouse space. The $1.6 trillion retail giant could aim for 50% of U.S. online sales in 2021, according to investment bank Needham. Refurbishment costs are minimal as shopping malls have enough headspace to accommodate delivery trucks.

Landlords will still get burned, though. Five years ago the typical yield on UK shopping malls was 4%. Asset value slumps in 2020 mean this is now more like 7%, according to estate agent Savills. For a building with 1 million pounds of annual rent this sort of yield shift is the difference between a property being worth 25 million pounds and 14 million pounds – a 44% drop. Prevailing yields on warehouses are 6.5% – not enough to get values back where they were.

Repurposing offices is also tricky. Turning BP’s recently flogged headquarters in central London into posh apartments is an obvious move. But a shortage of affordable housing means councils may not grant planning permission for luxury flat conversions. Cheap apartments may attract as little as 2 pounds a square foot in rent, according to Knight Frank – a far cry from the 100 pounds a square foot level for top-tier offices. Real estate kings should prepare for lasting scars.

(This is a Breakingviews prediction for 2021. To see more of our predictions, click here.)


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