REALX: Record $70bn dry powder but some concerns

(Top L to R) Richard Betts, Simon Mallinson, (Bottom) Daniel Harris, Jason Oram.

There are record-high levels of capital available for investment in real estate, but the Covid-19 pandemic is having an unpredictable impact, delegates heard at the ‘Capital flows – where is the capital heading?’ briefing held at REALX.Global, the virtual trade fair organised by Real Asset Media.

‘This is a very differerent crisis from the GFC, with different causes,’ said Jason Oram, partner, fund manager, Europa Capital. ‘It is a consumer crunch, not a credit crunch, but it could well turn into a credit crunch’.

The role of real estate has been very different too, as it has gone from being part of the problem to being part of the solution, but sectoral divergence is becoming more marked.

$70 billion available – highest ever

‘There was a toxicity about real estate going into the GFC, but there’s no such negative association this time around,’ said Oram. ‘In contrast to the GFC there is also a lot of liquidity in the market. The dry powder available for investment is $70 billion, the highest ever. But there is a concern about the negative impact of the crisis on some real estate sectors’.

The crisis has led to an acceleration of existing trends in European real estate, but there have been some surprises as well.

‘It has been interesting to watch how this crisis has speeded us trends,’ said Daniel Harris, principal, head of European investments, Cain International.

Retail and hospitality, which had already shown weakness, have been badly hit. Logistics, which was already doing well, has built on its success. Residential has been a mixed picture, with no demand for inner city luxury apartments but a great need for affordable housing and homes with outside space.

‘What is surprising is how hard hit offices have been,’ said Simon Mallinson, executive managing director, Real Capital Analytics. ‘It was difficult to predict that Manhattan or the City [of London] would be deserted’.

Office sector expected to bounce back

Experts agreed it is a temporary blip and that the office sector will bounce back.

‘There may be a more fragile office take-up environment now, but it’s against a background of incredibly low vacancy rates and without the euphoric speculation of the past,’ said Oram. ‘We believe in offices and in the creativity that comes from collaboration and human interaction’.

It has been said that working from home is a privilege for the privileged: fine for those with big houses and a separate study but tricky for those with small shared flats. JP Morgan is bringing everyone back to work in New York and many more may follow.

‘We are a big believer in offices, because there are huge inefficiencies in working from home’, said Harris. ‘Offices will have to change of course, they will have to be more spacious, there will be no more sitting shoulder to shoulder and the focus will be on ESG, health and treating staff well’.

Investors have taken a pause to reflect and work out the most viable strategy and the best opportunities, but they will return to the market.

‘With bond yields at low or negative levels, interest rates at rock bottom and the stock market all over the place, real estate does look very attractive,’ said Harris. ‘People will increase their exposure’.