UBS: WeWork fallout will unlikely impede office sector in 2020

Zachary Gauge, European Research Analyst, at UBS Asset Management, explains:

“We have long publicized concerns over the business model of that particular company, which were ultimately mirrored by equity investors in 2019. But developments since the failed IPO suggest that the risk of defaults within their existing leased portfolio are relatively minor.

“The company still has powerful financial backers, and with the largest now taking an 80% stake in the business we have seen a clear shift away from the ambitious growth projects and a focus back on the core business. This essentially involves making the existing serviced office portfolio more efficient and profitable. And it is important to remember that this entire business model rests on the company being able to do deals with landlords for office space across the world. Should the company default on any of their existing lease obligations they would immediately lose all credibility with landlords and make it extremely difficult, if not impossible, to acquire future space with the business in its current form.”

WeWork has been a major contributor to occupational demand in Central London over the past five years, and more recently in the regional markets. But with their expansion plans on hold, there will inevitably be an impact on take-up levels in the short term.

UBS also expects to see a growing caution in 2020 among landlords in leasing space to serviced office occupiers in general, which will ultimately act as a constraint on demand levels. However, with supply in many markets hovering around record lows and limited development activity coming through, UBS still has a moderately positive outlook for average rental growth in 2020, with prime expected to see stronger growth across the main markets.

Zachary Gauge added:

“One of the clear investment trends from 2019 was a continuation of the shift towards the non-traditional asset classes, with the share of investment volume rising to 44% of the total and comfortably a new record high. And with these non-traditional sectors generally ranking very highly in the investor preference survey, 2020 will see a continuation of this trend. However, yields for the long-income structured alternatives have been driven down to very low levels, partly in response to the strong demand for income security in an uncertain environment and against a backdrop of record low-interest rates.”

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