While there is plenty of money ready to plough into real estate, investors are struggling to spot opportunities, as the coronavirus landscape upends previous safe havens, and presents few obvious alternatives.
Sessions at Real Estate Tomorrow looked at occupational trends, as well as where opportunities might lie in the medium term.
Mark Clacy-Jones, fund strategist-real estate at Aberdeen Standard Investment, warned: “We’re expecting a subdued return environment for the next two to three years.”
“I don’t think landlords have much choice,” adding that they will need to take an operational risk. “A lot of the structural trends have just been speeded up by covid.”
“Retail is off the menu, offices are a question mark, logistics we see a clear benefit now, hotels I think are taking a very hard hit in the short term.”
“The nature of cyclicality has changed substantially,” said Cedrik Lachance, director of Reit research at Green Street Advisors. Having previously favoured investment in student accommodation, the fundamentals underpinning that niche are now in question. He said it is worth looking to the public markets, to gain a feel of what’s moving.
“To us, the big change here is work from home – from our perspective, wfh is a big deal.” He predicted an impact on office rents, transport styles, “and it’s going to have an impact on residential real estate.”
Some now see opportunities in healthcare coming to the fore, as the fallout from coronavirus focuses minds on structural issues in the sector. Andrew Ovey, head of healthcare at AXA Investment Managers, noted that his long involvement in the sector had been marked by “institutional and infrastructural inertia in healthcare.” But, he noted, once forced into change by circumstances, it could happen. “We’ve seen almost 90% adoption in telehealth.”
Duncan Owen, global head of real estate at Schroder Real Estate Investment, also sees health and wellness as a big trend going forward, while feeling the pandemic has also forced many to reconsider their supply chain resilience.
Coley Brenan, head of Europe at KSL Capital Partners, said he was also interested in the healthcare sector: “It’s a great time of opportunity,” in different parts of the capital structure. “There’s a lot that’s unique about this particular downturn, not least the healthcare component.”
Puneet Kanuga, head of hospitality investments at Queensgate Investments, said the current situation was fundamentally different from the last downturn. “There isn’t any distress in a meaningful sense – in Europe, lenders have generally been careful.” He warned that, in hotels,
liquidity remains an issue. While some talk about a 30% occupancy delivering operational break-even, he worried how long will it take to get to return to a genuine break-even.
Brenan acknowledged his UK hotels, the Village portfolio, had fortuitously implemented changes that have helped in the coronavirus landscape. “Three years ago, we started implementing self check-in, that led to keyless.” And he said there is an opportunity in the short term to test further innovation: “You’ve got very sympathetic customers – there’s an opportunity to experiment.”
He declared himself firmly in favour of a vertically integrated investment: “The math is very compelling – you want to own and control as much of your p&l as possible.” He said his team had looked at the UK Travelodge business in the past, and would have wanted to unite the real estate with the operational business.
While KSL has yet to see deals from distress, he suggested there could be some “where they went big on ground lease financing: that said, we’ve looked at it on a number of occasions.” Kanuga, who has participated in some major ground rent deals via Queensgate’s involvement in the Grange hotel portfolio in London agreed: “It works for some deals, it doesn’t work for all deals.”
HA Perspective [by Andrew Sangster]: The notion of lots of dry powder waiting to pounce has created an atmosphere of complacency among some observers in the sector. Even if businesses struggle, they will soon be snapped up, runs the argument. I’m not so sure.
Analysts at Bernstein put out a note this week looking at the potential for conversions for the global major hoteliers. The expectation is that conversions will greatly accelerate, as in past downturns. In 2011, a couple of years after the GFC, 46% of Hilton’s unit growth was conversion but in 2019 it was just 20%.
Bernstein reckons there are 795,000 hotels globally with Booking Holdings listing 472,000 properties in March 2020 and saying there is room for more. But most of these properties are small hotels.
Even so, Bernstein reckons that 63,000 hotels are suitable for conversion, equivalent to 250% of the combined size of the big four – Marriott, Hilton, IHG and Accor.
That is perhaps the good news. Bernstein reckons 7% of global hotels will close (1.4% of branded) over the next four years. The UK has lots of small hotels relative to its European peers, with just 224 independent hotels having more than 100 rooms. This compares to 1,000 such properties in Germany and 2,000 in Italy.
So the hotels going out of business, particularly in the UK, are unlikely to end up being run under brands. Closure and change of use seems most likely and this will be done quietly without attracting much attention.
There will still be consolidation among the branded chains. And this already ongoing trend will, again, be accelerated by the impact of the virus. A similar pattern seems likely in most other areas of operational real estate with established brands taking market share at the expense of unbranded independents.