With the COVID-19 pandemic worsening in western Europe as we head into winter, it is far from clear what short-term, let alone lasting, impact the outbreak will have on the real-estate sector. The stop-start recovery has been more stop than start, and a flurry of summer vacations coupled with loosening social restrictions for business and pleasure looks very ill-advised in retrospect.
Certain industry segments never got back in business. Prospects are particularly dim for hospitality and retail assets, says Casper Studer MRICS, the head of real estate, hospitality and construction mergers and acquisitions at EY in Switzerland. It is time for investors to play defence across the board.
Studer would be allocating to liquid real-estate investments given the uncertainty: REITs, funds and property stocks. Investors also need to ensure that any new allocations they make balance with their existing risk.
“Defensive assets with predictable income streams aim to balance short-term risks, and are therefore essential,” Studer explains.
Regional winners and losers are hard to identify yet. Having withstood the first wave of infection, countries such as France, Spain and Germany face a second, bigger deluge that may swamp them. As of mid-October, the continent is accounting for more than 100,000 new infections per week, one-third of new cases recorded worldwide.
“It is still too early to say which regions will suffer the most in the aftermath of COVID-19,” Studer says. But he feels it is likely that southern Europe will struggle for years to come as a result. Portugal and Spain, for instance, have almost doubled the size of their tourism industries in the past decade, with visitors to Spain delivering 5% of the entire economy before COVID-19 struck. In Portugal, one in 10 workers serves the tourism industry.
“Numerous jobs that have been created in the sector over the past decade will be lost again,” Studer asserts. “Overcapacity of hotel beds will lead to lower revenue per available room, and with that, it will be much harder for hotel operators and investors to make a decent profit on their investments. Hence risk premiums will increase, and pricing on hotel assets is likely to decrease.”
Scandinavia and Germany have the best prospects in Studer’s eyes. The Netherlands should also sustain interest for years to come, he believes. Ultra-low interest rates do support European housing markets, sustaining some demand, but positive immigration rates are a necessary antidote to the declining local population. Such newcomers are not always a politically palatable solution in nations helmed by stridently nationalist leaders.
In terms of sectors, Studer identifies logistics and healthcare as the best options, with advanced supply-chain networks necessary to deliver the increased flood of e-commerce orders. Hospitals and health clinics benefit from those longer-term ageing trends, even if they are not necessarily direct beneficiaries of the fight against the pandemic.
Studer would prefer, given the option, to cast his vision farther than continental Europe. For investors with a global mandate, he believes prospects are best in Southeast Asia. The demographics of emerging Asian nations, with rising disposable incomes and youthful, growing populations, are far more attractive than the downbeat demographic trends in Europe.
Despite low interest rates, housing is a tougher ask as an investment in Europe, since shrinking populations shrink demand. By contrast, he sees rental-growth potential and improving risk-return characteristics for emerging Asian countries.
“Technological adaptation will prove extremely valuable in terms of building more resilient property investments” Casper Studer MRICS, EY
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Aggressive investors, of course, sniff opportunity in Europe amid the uncertainty. Private-equity investors and venture capitalists are setting the pace, Studer notes, seizing opportunities to buy into beaten-down segments such as hospitality and retail.
But those opportunistic investors are diametrically opposed to the steady and relatively low-risk returns most investors seek out of real estate. Conservative investors are not necessarily being rewarded for taking on fixed, illiquid assets at this time.
Studer advises that investors take this period as a downtime to reassess their strategies. They can ensure their portfolios exceed the thresholds set for environmental, social and corporate governance standards. Investors should make sure they can stay a step ahead of technological changes as well, in terms of modern building technologies such as modular building, and digital real-estate asset life-cycle tools such as BIM, portfolios calibrated with advanced portfolio-management and data-analytics tools.
“Technological adaptation will prove extremely valuable in terms of building more resilient property investments,” Studer says. The wealth of data resources and the applicability of existing technologies are still far from being captured, he adds – capabilities that, from a financial perspective, are “immense.”