The coronavirus pandemic is reshaping the way in which money is invested in the real estate market in the near to medium-term future. Consumer appetites for more efficient properties with flexible spaces that offer healthy and safe environments are increasingly in demand. But, what are the challenges and opportunities that investors need to be aware of?
According to Simon Townsend, who is the director and head of valuation and consultancy at CBRE, the impact of Covid-19 on the real estate markets, and the shifts and changes to the fundamentals is expected to continue to be seen for a little while longer.
“The social and economic impacts have been well documented, and the real estate markets have not escaped the pressures this caused,” he explains. “Whilst there have been global shifts in many markets, real estate has shown some resilience, and there continues to be activity in the investment markets, albeit maybe the dynamics and nature of the players have changed.”
With any challenge comes opportunity, Townsend notes. While historical trends in terms of revenue and capital growth give some indicators of how markets have performed, he says the impact of COVID-19 has reset the base. This is why before considering any investment in real estate it is essential to seek advice around the asset type, market and sub-markets and, importantly, what return criteria is sought to reflect the investor's risk appetite.
“Obviously with higher risk could potentially come higher return, noting the emphasis on ‘could’,” says Townsend. “The investment purpose is also important – is it a medium to long term wealth preservation hold or short-term, value-add capital appreciation approach.”
As the return on any investment is driven by the revenue (and duration of that revenue) that asset will derive, the key challenges being faced are impacts on current and projected rentals, impacts of potential costs (whether incentives for tenants/refurbishment costs) and importantly the duration of occupation.
“Changes to the economic environment have also impacted tenant covenant strength,” Townsend adds. “Many long-established companies have seen their balance sheets heavily impacted, especially in sectors such as retail and aviation, and the risk of these tenants being able or willing to continue at current levels of occupancy may be questioned.”
It is also worth considering what the “new normal” in terms of working practices, e-commerce, flex-living and potential growth in staycation markets means for the investment markets. “This continued lack of transparency in the market and the continued market uncertainty makes the importance of sourcing the right advice more relevant than ever,” Townsend explains. “Whilst there are opportunities in the market, there are many challenges, and many investors are looking to acquire assets to counterbalance potential portfolio changes due to COVID-19.
“Government policies are also evolving to try to breathe life into these markets and the real estate sector. Independent advice around changes to investment structures and taxes in these markets is also something that needs careful consideration,” he concludes.
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