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The real estate market has been deeply affected by the COVID-19 pandemic, which has rapidly changed consumers’ habits and behaviour, with a direct impact on several asset classes and strong repercussions on investors’ allocation and strategies.
The pandemic has accelerated some trends already evident, exercising a noticeable influence on the view that investors have on retail and particularly on shopping centres,” says Laurent Camilli, Head of Real Estate at Clearwater International. “Before the coronavirus outbreak, global consumption was already moving towards digital shopping and investors were showing uncertainty and even some mistrust towards investing in large shopping centres. This trend has accelerated due to the pandemic, which has had a critical impact on the entire retail segment. To have an idea of how deep the impact has been, we can take a look at how valuations of listed companies operating in this sector have plummeted. Shopping centres company Unibail, for example, was trading at €215 per share before the pandemic, and is currently valued by the stock market at €40 per share¹.
The pandemic has affected working habits, encouraging remote working and putting under scrutiny the ongoing trend for densification of the workplace. “The impact of the crisis on the office market has been deep and is already tangible,” says Camilli. “The spread of remote working has changed the view of what the needs of office buildings really are. This is especially true for large central business districts, such as Region Ile-de-France in Paris and the City of London. Around 10% of these areas could become vacant in the next three to five years. This concern has caused uncertainty and distrust among investors towards this asset class, considering that the rental value will probably decrease in the coming months, but the cap rate will remain the same, around 3.5-4.75% depending on the location.”
the ability to acquire a number of freehold assets with a strong operating partner ready to trade can aid capital deployment rates and provide attractive long-term returns
The hotels and leisure real estate segment has also been heavily impacted by the pandemic, with numerous deals delayed or put on hold. Camilli says: “The sector will probably fully recover only in 2022, while investments will remain very scarce in the upcoming 18 months. There might still be investors’ appetite for some strategic assets, but buyers will take into account in their valuations that the next two years will be quite challenging.”
Richard O’Donnell, a Partner at Clearwater International, adds: “We expect to see a number of transactions in the coming months where operating businesses with freehold assets partner with real estate funds to step-change the scale of their business. This will only apply to those operating businesses that did not have stretched balance sheets pre-COVID, but the opportunity to accelerate growth through partnering with a real estate fund will be attractive. From the perspective of real estate funds, the ability to acquire a number of freehold assets with a strong operating partner ready to trade can aid capital deployment rates and provide attractive long-term returns given underlying tenant strength.”
Healthcare real estate, which includes both retirement homes and private clinics, has shown its resilience among the pandemic
Interesting opportunities are also available across the healthcare real estate segment, which comprises the most economically resilient property type in the industry. “Healthcare real estate, which includes both retirement homes and private clinics, has shown its resilience among the pandemic” says Camilli. “After the March 16 all the stocks of all the big listed real estate companies dropped down, except for one company, Edifica, a Belgium company which focuses on healthcare real estate assets and which has been traded with a premium on its net asset value.”
“There is no lack of liquidity in the market,” says Joe Dyke, a Partner and Head of Clearwater International Real Estate Finance in the UK. “Most of the funds operating across the real estate industry have committed capital and minimum return rates to hit and need to deploy capital into good assets.”
He adds: “Some of the largest investors which at the beginning of the pandemic had pulled out of transactions have started to come back to the market, while numerous alternative and special situations funds have been looking to deploy their capital. On the operator side we have seen well capitalised groups interested in partnering with providers of equity and debt to take advantage of attracting buying opportunities. In the next 12-24 months we expect to see a wide range of deals and interesting transactions, especially for those investors that have the right amount of liquidity available.”
1. Accurate as of 21/08/2020