Weathering The Crisis:

What Future For Real Estate?

Real Estate across the globe has taken a huge hit by the Corvid-19 crisis as businesses and retailers close indefinitely, while customers are locked in their homes.

In the US and UK, the ‘brick-and-mortar’ retail sector has been in a sensitive state for some time as people have been deserting the high street and opting for online shopping. Even the new hyper-malls that had focused on the out-of-town shopping experience have closed during lockdowns imposed by governments around the world. Add to this the closure of all restaurants, pubs and hotels, and thousands of small and medium-sized businesses are now struggling to survive for month to month.

Consequently, real estate investment businesses are finding it difficult to collect rents. In London, Intu, a property investment trust, claimed it received less than 30% of the rent due to the company in Q2. This compared with almost 80% in the corresponding period the year previously. Elsewhere, Hammerson, an out-of-town retail parks developer in the UK, said it had only received 35% of Q2 rent from clients.

On the UK high street retailers such as BrightHouse and Debenham’s filed for administration along with Italian restaurant chain Carluccio’s. These were only the big names, many more smaller businesses followed.

Such horror stories were echoed across North America, Europe and Australia as real estate was hit worldwide. As with London, the sectors hit hardest in different jurisdictions were hotels, restaurants, bars and general entertainment outlets followed by retail and housing (particularly second-homes).

How this plays in the coming months and years is difficult to predict. But all real estate analysts agree there will be a sea change in the medium term at least as home owners, retailers, landlords and investors rethink their rental and investment strategies.

Real estate investors will probably take a wait-and-see approach against continuing uncertainty in global markets. For landlords, short-term rental growth expectations will need to be revised downwards and weak economic growth will have a big impact on the business activity of occupants. This in turn will increase the risk of business failures and thus tenants going out of business.

Individual sectors such as hotels and retail parks look most vulnerable as holidays, family shopping and business trips are cancelled. The wholesale cancellation of business travel may well have a lasting impact as companies adopt technology such as virtual meeting rooms and video conferences, while near-shoring supply chains will reduce demand for cross-border business travel and overseas rentals.

The industrial and manufacturing sector will also be hard hit, certainly in the short term, as companies defer rents and ride out the crisis the best way possible.

In the office sector, clients will want far more flexible arrangements as more people work remotely. This in turn will have a dramatic effect on office locations and the amount of office floor space needed. Given continuing social distancing in the short to medium term, employees will no longer want to travel and so city centre locations will no longer be the most desirable office locations. It’s possibly in the retail sector that the biggest opportunities will open up. Online supermarket Ocado witnessed such a huge surge in orders in early March the company assumed its servers had been hacked. Other retailers such as Wal-Mart and Tesco tell the same stories.

Those shoppers who seldom used online retail previously will more likely be adjusting their buying habits for certain items, shifting their spending away from physical stores to online retailers.

Above all, as people and businesses adjust to the new reality they will be making decisions about real estate that property investors will have to foresee and adjust to if they are to weather this crisis successfully. There will be possibly be a realigning of the relationship between real estate owners and managers, and their tenants, from housing and retail to office space and industrial units.

Trust could play a big part in future business opportunities and occupiers will no doubt remember the closer relationships built during these difficult times. Tenants and landlords will have to look at and even agree on new rental prices and locations. Consequently, not only customers but lenders will have to understand how to navigate the new environment if they’re to prosper in the future.

In the following pages, several real estate experts from IR Global will analyse what impact the Covid-19 crisis will have on real estate in their different jurisdictions.

One takeaway from the discussion is that it’ll be a learning process for everyone involved in the months and even years ahead.