Fredrik Skoglund Chief investment officer Banque Internationale à Luxembourg
Photo: Banque Internationale à Luxembourg
Excitable early talk about how the virus might kill office life have given away to more nuanced ideas of hybrid working featuring a larger element of remote working. Yet real estate fund managers over-exposed to office property are looking with envy at other assets which are benefiting from the new normal.
“Certain real estate sectors like commercial and retail have seen decline, although renegotiation of contracts and rents have enabled the effects of the downturn to be managed,” said Kavitha Ramachandran at Maitland.
As in the rest of the world, in Luxembourg, “banks, law firms, big four firms and fund administrators have only around 30% of their staff onsite,” noted Pierre Weimerskirch of LIS Luxembourg.
Where will we work?
“Maybe the new norm will see a substantial part of the workforce working from home--at least on a partial basis. If the office is to be used to meet and socialise with colleagues, probably less office space is needed,” Weimerskirch said. As well, “student housing is another area which is feeling the negative impact of the pandemic,” said Ramachandran.
Covid has had a particular chilling effect on the sector, agreed Ilario Attasi of Quintet Private Bank: “Real estate has seen a sharper slowdown in fundraising compared with broader private markets, as a recessionary environment has put pressure on rental income and capital values.” He too highlighted the in-store retail and office sectors as being particularly hard-hit by the move to working from home. As elsewhere in the alternative sector, with markets being held in suspended animation, valuations are hard to achieve with accuracy, further dimming investor appetite.
Nevertheless, there are signs for optimism. Weimerskirch noted: “Logistics is a sector which has developed very positively. As a lot of the shopping moved online, the construction of new warehouses and the management of the logistics/supply chain was a big focus.” Attasi had a similar assessment: “Opportunities exist in segments such as logistics and residential real estate.”
However, there too, portfolio managers will need to spread their risk. “Some analysts expect a potential drop in housing prices in bigger cities if there is a trend for big city dwellers [moving] to the suburbs or beyond, due to the potential continuity of teleworking opportunities,” said Joost Mees with JTC.
Public-private infrastructure projects might present important opportunities. “Much has been written on the intended increase in infrastructure investment by governments keen to create employment and investments,” said Ramachandran.
As well, an ongoing focus on sustainability could also have an impact. “There seems to be an even bigger push towards investing in ESG-linked real estate assets,” noted Mees.
Building on existing trends
This is in line with the view of Fredrik Skoglund at Banque Internationale à Luxembourg that the pandemic is set to accentuate existing trends. “For private real estate, lower rents and expected income streams could push values down, but the fall in interest rates will also buffer the effects of this through lower discount rates,” he said. “Nevertheless, the real estate risk premium required today would have to be larger given the higher level of uncertainty, and having a significant pipeline with many pre-identified assets may not be attractive to investors anymore.”
This is due to both likely adjustments in asset values, and also because of the changing tenant demands that could impact longer-term price trends. Skoglund stated: “These structural trends were already quite visible before the pandemic.”