Hunt for yield may be even more pronounced
While the global economic turmoil wrought by Covid-19 is unlike anything in recent memory, commercial property experts say there are still lessons to be learned from the GFC.
Richard Kirke, International Sales Director at Colliers International in New Zealand, says the hunt for yield could be even more pronounced following the current crisis.
But right now, the fast-changing situation makes forecasting extremely difficult.
“The world’s markets are extremely volatile as investors struggle to form a view on the economic consequences of Covid-19.
“At the same time, investors, occupiers and real estate advisors are trying to gauge the impact on the commercial real estate sector.
“None of us can tell exactly how this will play out, but some certainties have already emerged.”
Here’s what we know:
- Freedom of movement has been significantly impacted globally;
- As a result, the tourism industry globally is at a standstill and many companies will not survive, including some hotel chains and airlines;
- Retail is an equally hit sector;
- Governments have been quick to inject cash in a desperate attempt to support ailing economies;
- Interest rates are at or near zero in many of the largest economies;
- Banks will work with existing clients only;
- Many tenants are unable or unwilling to pay rent;
- Interestingly, in an environment where cash is king, there has to date not been a rush of redemptions from open-ended real estate funds.
Kirke says New Zealand’s commercial property sector is likely to look very different when Covid-19 is in the rear-view mirror.
“Whilst accepting this economic downturn is different to anything in recent memory, there are still lessons to be learned from the GFC, and SARS in Asia.
“A key observation is that a significant amount of cash created by quantitative easing ended up in real estate as investors chased yield. This has the potential to be even more pronounced following this downturn.”
The following represents our collective thinking for the post-Covid real estate sector:
- Public debt will be a burden for years to come;
- Interest rates will stay at near zero for a significant period;
- Many businesses will be smaller;
- Tenant covenants will be a key consideration;
- Consumer spending will be slow to recover;
- Governments will continue to take measures to stimulate economies;
- Occupier demand will continue but likely to vary across the sectors; for example, the move to online shopping is likely to have been accelerated by Covid and this change is unlikely to reverse post-virus.
Peter Herdson, National Director of Colliers’ Capital Markets team, says investors are likely to chase those asset classes least affected by the market turmoil.
“Industrial will be a standout; distribution centres will be particularly sought-after as online shopping becomes more prevalent. The premium office market will also maintain strong demand.”
Herdson says tenant covenant is likely to become even more of a key consideration than previously.
“Investors will look for essential services tenants to safeguard rental income against the impact of possible future pandemics.
“Large corporates with the cash reserves to ride out similar crises in future will also be highly sought by investors.”
Greg Goldfinch, Industrial National Director at Colliers, says a new tenant covenant rating of A++ is likely to arise post-Covid.
“These A++ tenants will be businesses that have proven to be pretty much recession proof.”
Goldfinch says investors will likely still see the industrial sector as a ‘safe haven” and will pay handsomely for premier offerings.
“Industrial investors will seek A++ tenant covenant – thereby ensuring their cashflow is secure for the term of the lease – as well as long leases and sound underlying real estate.
“Whilst there will be some increased vacancy, it will potentially come as a welcome relief to the sector given vacancy rates have been sub-2 per cent and occupiers have had very few options if they are looking for new premises.
“Consequently, we will also see less spec build activity as developers and owners are capital constrained and more risk averse.”
Herdson says savvy investors will still find plenty of opportunities to build strong portfolios in the post-Covid global economy.
“Long-term strategic thinking, combined with the flexibility to pivot and adapt at speed, will be crucial.
“Those investors who are already in discussions with their trusted property advisors will be in the best position to seize the opportunities to come.”