AGE OF UNCERTAINTY
REFOCUSING ON RESILIENCE
Asset resilience, geographic resilience and market resilience are inextricably linked and will support commercial real estate investment decision making and performance in the next stage of the cycle.
PREPARING FOR A SHOCK
Last year’s Active Capital research advocated strategising for a recession and positioning for an unknown shock, mindful that at the end of a long economic growth cycle, and in an environment of low interest rates, extensive quantitative easing and debt, there were fewer ‘traditional’ tools left to offset a future downswing.
With that in mind, we suggested that investors would:
- Focus on local market dynamics
- Examine market liquidity
- Explore asset classes that align with structural changes, such as an ageing population
- Consider accessing real estate lower down the capital stack through debt
Roll forward to 2020 and we have faced a significant global shock with the advent of Covid-19, bringing worldwide health and economic consequences. A wide range of measures has been employed globally in an attempt to rein in the economic fallout of pandemic-driven lockdowns. Central banks have reduced interest rates, where possible, and quantitative easing has been pushed even further, both in the amount and type of instruments open for purchase. With limited scope for more traditional measures, some governments have deployed ‘helicopter money’ and other fiscal and monetary support at levels not seen for decades, ranging from financially supporting millions of workers, to directly backing lending.
Navigating real estate markets has become more complicated since the onset of the pandemic and requires a greater depth of analysis than ever. At the heart of this decision making will be thinking innovatively and building resilience into the real estate decisions made.
WHERE ARE WE NOW?
The influence of the pandemic continues to be felt throughout financial markets, economies, and society in the broadest sense. Optimists point to the unwinding of lockdowns, the reopening of trade, and a return to a degree of ‘normality’. High-frequency indicators report a sharp rise in economic activity, as people return to work, and the worst predictions for output reductions have not come to pass. Pessimists highlight the long road to recovery for GDP levels, the risk of a second wave of infections, and disruptions to previously accepted norms in almost all walks of life. Those charged with making real estate decisions will be familiar with the difficulties of weighing both perspectives. Yet perhaps the most fundamental challenge is that of rising complexity: navigating real estate markets has become more complicated since the onset of the pandemic and requires a greater depth of analysis than ever. At the heart of this decision making will be the need to consider how innovation, sustainability and leverage can influence the resilience of real estate performance.
WHAT LASTING IMPACT COULD THE PANDEMIC HAVE ON COMMERCIAL REAL ESTATE?
Governments and central banks have provided historic levels of support, which will shape the economic and financial environment for years to come. We expect interest rates to remain low and governments around the world to function at ‘new-normal’ levels of debt. Even if this debt is not paid down, interest will need to be serviced, which will mean lower government spending, future tax rises, or both. At a corporate level, many firms are operating at eroded margins and with increased debt that will also need to be serviced and repaid, potentially slowing their pace of growth.
The pandemic has also provided a shock to typical human and corporate activity on which real estate is dependent. This is accelerating the structural changes we were already seeing across the world; for example, the rise of online shopping and working from home. We do not expect the adoption levels of these behaviours will be maintained to the same extent they were in the early stages of the pandemic. Nevertheless, real estate investors need to be innovative and adaptable, forming investment strategies which align with these structural changes.
Real estate which harnesses asset, geographic and market resilience will continue to be a draw for investors.
Whatever happens, real estate investors need to be innovative and adaptable, forming investment strategies which align with structural changes.
WHICH TYPES OF REAL ESTATE WILL INVESTORS TARGET?
Real estate which harnesses asset, geographic and market resilience will continue to be a draw for investors. This includes:
- Core, ‘safe-haven’ income-producing real estate, such as offices, in the most liquid global centres such as London and Paris, which demonstrate market resilience.
- Real estate assets across broad sectors, in geographically-resilient locations that are rich in drivers of innovation and research. Locations underpinned by innovation should continue to see the necessary wealth and population growth to drive demand for real estate, both in the occupier and investment markets. Identifying such locations was already important in a lower-for-longer growth environment. Knowing that innovation often arises out of economic dislocation, identifying these phoenixes becomes ever more important.
- Resilient assets which tap into the multiple government and central bank policies, which are mandating that the recovery should be green. For example, the European Union has launched a recovery package with tackling climate change at its heart, which the World Bank calls “the largest green stimulus programme in history”. Aligned with this, Christine Lagarde, President of the European Central Bank, recently announced a €2.8 trillion asset purchasing scheme to pursue green objectives. In Asia, South Korea has similarly announced its ‘Green New Deal’, equal to 5.8 trillion South Korean won ($5.9 billion) to be spent by 2022, covering green buildings and infrastructure, and almost the same amount for renewable energy creation.3