The pandemic has wreaked havoc in industries across the globe, but how has Covid-19 affected real estate? Funds Europe speaks with Natasha Head, senior business development manager of ManCo services and private equity and real estate at Maitland, about what the future holds for property investment.
What effect has coronavirus had on the real estate market? Will certain traditional property strategies require a rethink?
The pandemic has had an immense impact on people and businesses with social distancing measures vastly changing the way individuals use physical space. This poses a real threat to the real estate industry, not just due to short term cash flow challenges faced by businesses but the change in lifestyle and consumer behaviour.
Tenants once looking for security from their leases will now look for flexibility, but the extent to which the leases provide for items such as break rights, rent suspensions and even force majeure (becoming more common as a result of the pandemic) may negatively impact valuations and risk ratings. Certainly, from a lender and investor perspective, there will be greater scrutiny around contracts, the provisions in place and key insurances. Going forward investors/lenders will want a much more informed approach to asset selection.
Where are the opportunities / risks?
There are strong opportunities in industrial and logistics real estate. While forecasts for capital and rental growth have been revised down for the next twelve months (as with most industries), this industry is very well positioned to meet the demands of the more sudden shift towards online retail.
In contrast, retail is facing a hard time naturally as the shift moves online and away from highstreets and city centres, in the short term due to social distancing and restrictions, and longer term with the consequences of employees working from home more regularly and changing their preferences from high street to home. This comes with potential risks because we can’t foresee how this might play out, consumer appetite is very hard to predict at the moment.
From a broader perspective, there will be opportunities for fund managers looking to buy up distressed assets as we recover from the pandemic and, as we turn our focus from Covid-19 (back) to sustainability and social/environmental factors there is a huge role for the real estate sector to play in terms of developing and investing in commercial and residential real estate which meets this new demand for sustainable living.
Has the volatility sparked by the pandemic led to an acceleration of already existing real estate trends?
Looking at companies like Amazon Prime from a distribution and logistics perspective, this online trend was growing pre Covid-19 and to an extent flexible working and working from home so arguably these trends have been accelerated.
From a retail perspective, less so – the continued opening of new independent restaurants, gyms and cofFEE shops in city centres supporting city lifestyles has been halted and may face a substantial long-term impact.
Which, if any, real estate sectors run the risk of becoming obsolete?
There is suggestion of ‘the end of the high street’ which could have serious implications for retail and leisure.
While the pandemic has driven people to spend more time outside of the city potentially putting the city high street at risk, it has encouraged people to interact more with their local areas so we may see growth in retail and leisure activity in outskirt villages and smaller high streets. The fate of the larger town and city high streets is hard to predict but the real estate space surrounding the traditional high street has been identified as an opportunity for industry and logistics so high streets may find themselves repurposed rather than obsolete.
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