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Medium term history

The commercial property market saw exceptional value growth in the period leading up to 2007, which was immediately followed by a significant price correction during and following the 2008 global financial crisis. Values remained relatively flat for a number of years thereafter before recovering from 2013 onwards.  Commercial property has traditionally been considered an attractive asset class as part of a diverse investment portfolio, providing relatively long secure income with potential for rental and value growth depending on asset management opportunities.

The three main commercial property sectors comprising retail, office and industrial have differing market dynamics and are often counter cyclical.

  1. Prior to the COVID-19 pandemic many retailers were faced with challenging trading conditions due to reduced consumer confidence, rising occupational costs and an increased shift to online shopping resulting in a reduction in demand for physical retail stores.   This led to an increasing number of retailer CVAs and insolvencies, leaving units either vacant or with tenants paying a lower rent, which led to landlords suffering a reduction in their net operating income and ultimately a deterioration in property values.  
  2. The value of office buildings across the UK has generally remained stable. Supply in some major cities is low, which has helped to maintain rent levels, and occupiers were delaying their relocation plans pending resolution of the UK’s exit from the EU. There are pockets of distress where local industry has experienced change, e.g. in Aberdeen where demand for offices has declined significantly following the recent collapse of the oil price.
  3. The development of industrial property has traditionally been uneconomic due to high construction costs and low rents. However, the shift to online retail has increased the demand for both large logistic distribution and last mile delivery units, forcing up rents and improved lease terms resulting in institutional grade investments. 

Current outlook and challenges

The impact of the lockdown measures imposed by government in response to the COVID-19 pandemic will be felt across all major real estate sectors. The full extent of the impact will take many months and potentially years to be understood and, in the meantime, occupiers will reflect on their operational needs whereas property owners will assess the impact on their business and how they can adapt to these changing times.



In 2019, 19% of all retail sales were online versus only 11% five years earlier. This suddenly jumped to 30% in April 2020 following the enforced closure of all non-essential retailers in the preceding month. Prior to COVID-19 the retail sector was adapting to an increase in online shopping, which was forecast to grow, and it was generally accepted that there was a 30% oversupply of retail premises.

The enforced closure of many retailers followed by restrictive trading practices to maintain social distancing will likely result in more tenant failures and vacant units which many not be filled in the short to medium term, or ever where there is an oversupply of property. The structural changes previously forecast in the sector are likely to accelerate as retailers and property owners adapt to the consequences of COVID-19 and the ongoing and anticipated loss of tenants and guaranteed rental income as more tenants move to turnover rents. This, coupled with rising operational and holding costs, will likely drive values down quickly.

With limited prospects of a recovery in the retail sector in the foreseeable future, property owners and other stakeholders are now having to consider alternative strategies including repurposing assets for alternative uses where there is a significant obsolescence factor. Whilst prime and super-prime destination schemes are likely to be more resilient, although not immune from the impact of tenant failures and store closures, the secondary and tertiary schemes, where there is an oversupply of comparison goods and fashion retailers, are likely to see the highest loss of income and value reduction. Conversely, convenience retailers have performed well through the lockdown and more consumers have shopped locally with a glimmer of hope that this will have a positive impact on local high streets as retail slowly get back to normal.



The outlook for the office sector will most likely be driven by market sentiment following conclusion of Brexit negotiations. Whilst the UK economy is largely driven by the service sector, before COVID-19 we anticipated an increased demand for office space from professional services as well as the creative and technology sectors. However, as the majority of us embraced working from home and the benefits of technology, many businesses will now re-assess what space they need and how this is used in the future. The COVID-19 lockdown measures saw a number of services and flexible office providers lose their income overnight, which brought with it some challenges, however there is a sense that flexible office space may be part of the solution post-lockdown. Office landlords may therefore need to adapt to shorter leases and increase the amount of space that is used by flexible office operators.



Industrial property values and rents have increased considerably over the past few years making development economically viable. Multi-let industrial schemes with asset management potential are likely to remain desirable investments particularly as we expect to see rental growth in the short term. The demand for large distribution and logistics units is likely to continue as firms seek to stockpile product to minimise repercussions from any potential supply chain disruption post-Brexit. Despite this some investors are now turning away from the sector considering the pricing has become too keen.


For more information on KPMG’s real estate stakeholder options see here.

Stress and distress temperature rating

Real Estate sector temperature assessment as at 1 June 2020, covering medium term history and outlook:

Graphic showing the Real estate sector stress and distress temperature rating

Key trends across the sector right now

The structural changes affecting retailers will significantly impact on investors’ appetite to participate in the sector leading to a reduction in asset value.

  1. Retailer administrations, CVAs and store closure plans
  2. Move towards experiential and online shopping
  3. Reduction in market rents and increased tenant incentives
  4. High capital costs associated with repurposing and redevelopment strategies
  5. Long delivery times for new industrial and logistics units
  6. Low demand from investors for retail property

Case studies

Project Chalton – shopping centre sale

KPMG supported a Bank facilitate the consensual sale of a shopping centre. We provided the lender with visibility on short term liquidity requirements and the impact of the sale on their lending. We also supported the Bank in assessing their options including working with the sponsor and their marketing agents to agree and implement a strategy.

Legal and General House

KPMG were appointed LPA Receivers over this significant HQ office building when the borrower failed to repay its debt on demand.  A robust suite of technical documents was compiled including a detailed planning statement demonstrating the value add potential from residential development.  Sale completed within six weeks following a competitive bid process.

Project Hensler – shopping centre redevelopment

We prepared a cash flow model to understand the cash impact and the optimal point for relocating various tenants from one shopping centre to another as part of our client’s proposed town centre redevelopment project.  This model considered the existing income and costs, lease obligations and likely contractual terms for transitioning tenants including space requirements and occupational costs.


KPMG UK's national sector teams

Contacts on this page are specific to KPMG Restructuring sector capability. Our Restructuring sector contacts also work as part of KPMG’s national sector teams that comprise members from across our wide range of practice disciplines, e.g. Deals, Consulting, Tax and Audit. To find out more about KPMG’s wider views in this sector, click here.