22 March, 2020

Executive Summary

  • There were an unprecedented three major policy announcements in the UK in the week commencing 16 March, aimed at combatting the impact of the Covid-19 crisis on the economy.
  • The announcements included lower interest rates, more quantitative easing, substantial loan guarantees for businesses, business rate reliefs and income support measures.
  • Although these measures are welcome and are essential, the CBRE house view and the consensus view is still that the UK is about to experience a sharp recession.
  • Once the crisis is out of the way, however, the policy measures should help to facilitate a rapid economic recovery.
  • The wellbeing of the property sector ultimately depends on the underlying health of the economy so these measures will be supportive of the sector. Additional quantitative easing will also help to keep downwards pressure on funding costs.

An unprecedented week of policy announcements

In recognition of the seriousness of the situation, last week saw three major policy announcements, two from the Chancellor of the Exchequer and one from the Governor of the Bank of England. This note outlines the measures and briefly discusses the implications for the UK commercial real estate market.

Announcement by the Chancellor of the Exchequer

17 March

The 17 March announcement focussed on loan guarantees, business rates relief and mortgage holidays:

  • Loan guarantees for businesses totalling £330bn (15% of UK GDP).
  • An increase in the amount that an individual business can borrow using the Coronavirus Business Interruption Loan Scheme to £5m (from £1.2m).
  • An extension of the interest free period to six months (from three months).
  • Additional business rates relief (see our separate note).
  • A three month “mortgage holiday” for those having difficulty meeting residential mortgage payments.

20 March

Following closely on Tuesday’s announcement which focused on loan guarantees, the focus of Friday’s headline announcement was on employee income maintenance and direct job preservation, but there were a number of other policy announcements too. The main measures were:

  • An 80% wage subsidy, up to a maximum of £2,500 per employee per month, for workers who are temporarily laid off because of the crisis.
  • VAT payments due between now and the end of June to be postponed.
  • Self-assessment tax bills due in June deferred to January, benefitting up to 5.7m self-employed businesses.
  • Additional Universal Credit and Tax credit plus help for renters through the Universal Credit system.
  • Loans from the Coronavirus Business Interruption Loan Scheme now to be interest free for 12 months rather than six.

Announcement by the Governor of the Bank of England

19 March

Sandwiched between the two announcements by the Chancellor was an interest rate cut and additional monetary policy announcements from the Bank of England. The main measures were:

  • Interest rates cut to 0.1% - down from 0.25% since 11 March and 0.75% before that.
  • An additional £200bn of Quantitative Easing (purchases of UK government bonds and sterling non-financial investment-grade corporate bonds financed by the issuance of central bank reserves).
  • A new Term Funding Scheme with additional incentives for lending to SMEs.
  • Reduced bank capital requirements: the UK countercyclical capital buffer rate was reduced to 0% of banks’ exposures to UK borrowers. This extended banks’ capacity to lend to businesses by up to £190bn.

Overall Impact

These measures come on top of additional spending of £30bn announced in the budget on 11 March. Altogether they add up to a substantial mix of government loan guarantees, liquidity measures to allow the banks as needed to lend to businesses and at the new low interest rates, income support measures, direct fiscal measures and unorthodox monetary policy all aimed at keeping businesses going through the crisis, maintaining personal incomes and keeping the financial system going.

Quantifying the cost of the various measures is difficult because the eventual cost is conditional on the take-up of the measures and the eventual impact of the crisis on things like loan defaults. We can say, however, that loan guarantees of £330bn (15% of UK GDP) are substantial even if the eventual costs to the exchequer will be much less than that. Additional spending on tax measures are likely to cost at least £58bn (2.6% of GDP).

Nonetheless, we and almost all other forecasters do not believe that this will stop the UK from slipping into recession. By keeping businesses solvent, however, and maintaining incomes it will mitigate the worst impact of the crisis and help to facilitate a speedy recovery once the crisis is over. We have characterised the situation as “short-term brutal but medium-term positive” and these measures have given us greater confidence in the possibility that we will see the “medium-term positive” in the shape of a strong economic recovery once the crisis has passed.

Implications for property

The wellbeing of the property sector ultimately depends on the underlying health of the economy. Falling GDP and employment and company insolvencies mean less demand for commercial space of almost all kinds. Consequently, these policy measures must be welcome as they will help to prevent the Covid-19 crisis turning into an even deeper economic recession.

In addition, extra quantitative easing will take pressure off long-term funding costs. Pressure on sterling had contributed to an increase in 5-year swap rates from 0.45% on 9 March to 0.69% on 17 March. Following the latest policy announcements from the Treasury and the Bank of England, these fell back to 0.59% at the end of the week.

Despite this, we do expect that sentiment will inevitably remain suppressed at least until the extent of the virus become clearer and more certain. During this time, this is likely to have some short-term impact on property values and activity. The CBRE house view assumes that the peak impact on the economy will be in Q2, with a gradual recovery over the next three-to-four quarters although considerable uncertainty surrounds this timing. During this time, the negative economic impacts are going to be felt most acutely by occupiers in sectors most exposed to the anti-Covid-19 measures. These include hotels, leisure and non-food retailers. In the past offices and industrials have tended to be the most impacted by recession. This time it looks like it is going to be different. Many office occupiers are keeping going through home working and the now sizeable tech sector appears to be little affected by the crisis. Industrials stand to benefit from increased e-commerce traffic.

Time will tell what the long-term impacts will be. The long-term trend towards more flexible working practices could be accentuated by the success of home working policies. On the other hand, it could show just how much employees and employers value the benefits to teamwork and general business activities offered by face to face contact. In the e-commerce world, particularly for groceries, many more people will be opening accounts and the habit could well stick. For non-food purchases, the situation could be more complicated with the crisis revealing the extent of the synergies between on-line and bricks and mortar retailing.

Dr Neil Blake
EMEA Chief Economist