Global Chair of Real Estate, Interlaw, London
PLOTTING A WAY FORWARD FOR REAL ESTATE
William Clements, global chair of Interlaw’s Real Estate practice, looks at the immediate impact of the COVID-19 pandemic on the global real estate sector
In Interlaw’s recent webinar “Plotting a way forward for real estate: Understanding your options and protecting your investments,” two things became very clear. One, that COVID-19 has had an impact on the whole real estate sector and anyone with a stake in it. Two, we are in unknown and uncertain territory, and therefore planning is challenging.
However, where there is challenge, there is opportunity. We heard from Craig Tagen, head of asset management at US-based real estate investment firm, Clarion Partners, who provided us with an excellent market overview, before our experts from our US, German and Spanish teams took us through specific trends in their regions.
In summary, there were three key take outs:
Some sectors will continue to struggle, while others spark hope of recovery
The COVID-19 pandemic brought the real estate sector to a halt, with deals either put on hold or cancelled completely. As Craig Tagen said, “... when it comes to capital flowing into new deals right now, in short there is no flow, there is a drip. Where is the capital? It’s like us – at home and socially-distanced.”
However, he also told us that, despite the pandemic, those expecting a COVID-19 pricing discount could be disappointed. There has been no obvious discounting happening … yet. Why is this?
It is largely because there are huge variations in fortunes across different sectors.
For example, according to Clarion Partners:
- Multi-family residential, is faring relatively well, as many tenants are taking short-term leases while they wait to see what happens. This means landlords can achieve a short-term boost, helping to secure immediate cashflow.
- For Industrial, the pandemic has accelerated ecommerce, meaning demand for industrial space has increased. So, businesses are still signing leases, albeit not at the same pace.
- For Offices, leasing is very slow, if there is any happening at all, as businesses re-examine their strategy when it comes to office space. The pandemic has forced a huge number of employees to work from home, which has resulted in many businesses reassessing their property assets, for example, looking at whether they keep a city office, or have multiple satellite offices in the suburbs.
- Retail, perhaps unsurprisingly, is struggling, with rent collections in the region of 15-20% and many tenants seeking rent deferrals. While essential retail is doing okay, closures, from independent retailers to big malls, are likely.
- For Hotels, while it has always been a volatile sector, the pandemic caused hotel occupancy to drop to single digits. However, it does have the potential to rebound quickly when cities re-open and people start travelling again.
Pricing will be challenging
In the immediate aftermath of COVID-19, deal activity all but stopped, which has made pricing difficult to gauge for new transactions. For example, our colleagues in Spain reported that 30 percent of projects were abandoned and 70 percent have been delayed.
However, buyers should not assume that sellers will accept lower offers, as they did during the financial crisis of 2008/9. Future-proof buildings in some of the more robust sectors outlined above with the potential to be easily adapted will still command a premium.
In the leasing market, there needs to be open discussions between landlord and tenant about rental pricing. Here, transparency will be key, particularly in more troubled sectors such as retail and hospitality. These sectors, as well as the office market, will also be facing increased operational costs to conform with social distancing rules, for example signage, cleaning and HVAC.
In short, to get more certainty around value, the market needs to be more active, in terms of investments, acquisitions and leasing activity.
Flexibility will be crucial
For anyone involved in the real estate sector, investors, tenants or landlords, adopting a more flexible approach to doing business will be key to longer term prosperity. For example:
- The use of lease restructuring strategies will increase as tenants in the more distressed sectors seek rent deferrals. For tenants in this situation, it is important to have a plan in place. For example, a comprehensive six-month strategy detailing any efforts to raise capital, and how costs will be reduced will give landlords and lenders confidence.
- Short-termism will be common in the immediate future, as fewer long-term leases are signed, while both domestic and business tenants assess how the COVID-19 pandemic will impact them.
- When looking to sell a distressed asset, create a strong, flexible strategy to attract buyers. In addition, investors will need to be flexible in their approach while there is a short-to-medium term shortage of stock.
Pre-COVID-19, there was institutional capital ready to invest, and, as Craig Tagen outlined, it is still there, “waiting patiently in the sidelines.” What will get the real estate wheels moving again? The webinar panel agreed that a flexible approach to both acquiring and leasing property will be crucial to managing risk. So, we should expect more short termism, an unpredictable pricing market and a need for property stock to be adaptable to a changing environment. However, with green shoots emerging in certain sectors, we will also see equity returning to the market as cities re-open and confidence increases.
You can view a recording of our “Plotting a way forward for real estate: Understanding your options and protecting your investments” webinar here.
Note: The impact of the outbreak of COVID-19 on the economy and properties and operations is highly uncertain. Valuations and incomes may change more rapidly and significantly than under standard market conditions.