The shockwaves of the Covid-19 pandemic and lockdowns have ripped through global real estate investment markets leaving gaping holes in the cash flows of property sectors such as fashion retail and hotels, depending on shopping crowds and travellers. Existential questions have been raised over the future of central business district offices, writes Steve Hays.
But, as the dark clouds disperse over the nadir of the crisis in the first-half of 2020, the wide geographical disparities in economic and bricks and mortar performance are becoming clearer.
Global real estate benchmark data provider Real Capital Analytics’ (RCA) latest Capital Trends research reports for the second quarter show that both China and Germany, countries that proved relatively adroit in their handling of the health and economic fallout from the crisis, also generally showed greater resilience in their domestic property investment sectors than other markets in Asia Pacific and Europe.
Tom Leahy, senior director EMEA Analytics at RCA in London, noted: “In some respects the pandemic could be the perfect storm for real estate. Physical restrictions prevent property viewings and the potential economic fallout provides enough uncertainty to limit deal making when property prices are at record levels in many markets.
“However, volumes across Europe have held up much better than some other markets in North America and Asia Pacific.”
Benjamin Chou, RCA analyst in Singapore, added: “China’s commercial real estate market rebounded in the second quarter of 2020, while the worsening economic outlook took its toll on the investment sentiment across the majority of sector markets in the region. The demand for Chinese office skyscrapers leaped, with nine buildings priced over $250 million changing hands in the quarter. Logistics facilities and data centres also remained in vogue, helping China’s investment volume to double the tally of Q2 2019, according to preliminary Real Capital Analytics data.”
In the Anglo-Saxon real estate markets, the impact of Covid-19 on deal volumes has been substantial. In the US, real estate investment transactions fell 68% in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart in their price expectations.
Blackstone’s iQ student housing deal added £5.3 billion to the UK’s investment total in the second quarter and without this transaction, volumes would have been 68% down compared with Q2 2019. In the London market, the second quarter would have been the lowest recorded since 2001 without the Blackstone deal, RCA noted.
Logistics and residential resilient in Covid-19 crisis
The pandemic’s selective battering of economies around the globe has also been mirrored in the damage it has wrought across different property sectors, with grocery-anchored retail performing well as the world went into lockdown, compared with the footfall plunge in non-essential shopping, and logistics real estate benefitting from the boom in e-commerce.
Something quite remarkable has now happened to property yields, which represent rental income as a proportion of capital values. Historically, there was a 143 basis point-spread between prime shopping centre and prime logistics yields in Europe. But property agent Savills estimates that the European industrial/retail investment portfolio allocation has shifted from 25%/75% to close to 45%/55% over the five years to the beginning of 2019.
A result of the move in the weight of investment capital, those spreads have now converged. Indeed, in Q1 the yields crossed for the first time ever. The crisis in the retail sector has meant anticipated yields have kicked up marginally to 5.04%. Yields on prime logistics properties have dipped to 4.95%.
The strong demand for logistics means that warehouse tenants have continued to pay their rents, in contrast to many retailers, and so the listed owners of the real estate have been able to maintain their dividend payments to investors, compared with a swathe of other equity sectors where income from stock dividends has stopped. For example, Tritax EuroBox, which invests in very large prime logistics assets throughout continental Europe, recently announced that at the end of July it had received all agreed rent due. Four tenants with whom rent deferrals were agreed in Q2 have honoured the agreements made and paid in full.
While real estate investors are naturally cautious about what a post-pandemic investment world might look like, there are already signs that business is returning to a semblance of normality in some sectors, with deals pending before the crisis now being closed. This is particularly true of investments in residential properties, which have generally been less affected by the pandemic, due to the large supply/demand gap for affordable housing in most of Europe’s major cities.
Rising confidence in student housing
Even in student housing, where fresh-faced new undergraduates do not know whether they will have to combine on-campus lectures with distance learning, and forgo the raucous social life of their generations of predecessors when the academic years begins in September, confidence in the future appears to be rising. Bouwinvest, one of the largest Dutch institutional real estate investment managers, recently announced it was investing with Ivanhoé Cambridge and Greystar in the development and management of high quality rental housing properties for students and young professionals in the Greater Paris Region, with the investment capacity of the joint venture tagged at €1.0 billion.
“The market for education and thus also for student housing is in a state of upheaval in the Covid-19 era. Most universities are closed and online seminars currently dominate the curriculum. However, the limitations of this way of learning and the absence of a social component have also become clearly visible. We expect there will be a mix of both forms of learning — virtual and physical – in the future. We also think we will see the same trend as when the dotcom bubble burst in 2000 and after the onset of the Great Financial Crisis in 2008, with student numbers increasing significantly during and after the Covid-19 crisis and stimulating demand for student housing in a highly underserved market,” Michael Keune, Managing Director at Catella Residential Investment Management, part of Europe’s largest cross-border residential investment platform, said.
Mixed-use identified as being urban growth hubs
It is also not all ‘doom and gloom’ in retail real estate, with investment managers that have been adapting and improving the quality of their portfolios in recent years due to intensifying competition from e-commerce finding this has provided a certain level of underlying resilience during the crisis. That will allow them to seek new opportunities and growth as markets stabilise. This is the case with Redevco, one of the leading investors in European High Street properties. It is increasingly focusing on mixed-use retail-led urban investments in cities it has identified as being the growth hubs of the future.
“Covid-19 is a real stress test of our business and will accelerate macro trends that were already visible. The shift to online and omnichannel will speed up in the next year or two instead of taking place gradually over a period of five to 10 years…We were already shifting our emphasis from our retail specialism to retail-led urban real estate. Covid-19 has accelerated that process,” Redevco CEO Andrew Vaughan, said.
“Falling prices for retail properties will throw up more opportunities. We are positioning ourselves as an organisation to repurpose obsolete retail space into other uses. Reluctant retail owners are also looking at us to help them…this could accelerate our growth plans and speed up the diversification process. For the moment we’re having a short-term pause so that we can deal with the crisis and understand where we are and where prices are. But further down the road we expect our growth trajectory will get sharper,” Vaughan concluded.
Steve Hays is managing director of Bellier Communications