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Looking Beyond Short Term Market Dislocation

David Haynes • 21/04/2020

As highlighted below, returns to investors in specialist sectors are closely aligned to the fortunes of the underlying businesses.

The prevalence of shorter leases, turnover arrangements and direct operational investment exposes landlords to the ultimate industry sector in a more direct way than investing in conventional offices or logistics assets.

Each of our focus sectors life sciences, senior living and residential are impacted by similar short-term factors:

  • End-users cannot take occupation; whether students unable to return to universities, or retirement renters being unable to move in, so completions are delayed or rents are refunded
  • Construction slowdowns are causing delays to practical completion and highlighting development risk
  • Investor and lender appetite is reduced across markets

Our expert contributors look through these short term impacts on their markets to re-appraise the long-term fundamentals. The key is assessing when short-term market dislocation offers opportunity as recovery looms.

Two sectors have made very different headlines through the COVID-19 crisis.

Universities have been directly affected. Whilst teaching has continued virtually, rent rebates to students who cannot physically attend campuses and cancellation of events which generate summer income, are hitting private sector operators of accommodation and universities in equal measure. Investment in Purpose Built Student Accommodation (PBSA) markets has slowed but the fundamental strength of the sector will buoy market sentiment as the situation settles.

In contrast, the ability of business and society to get back to some form of normality appears to hang on the endeavours of our Life Sciences industry. The UK has a global advantage in biotech with world renowned clusters within the Golden Triangle (Oxford, Cambridge, London) and beyond. In a new world where immunologists and epidemiologists are household names, and politicians seek resilience in the face of future threats, demand for laboratory space will accelerate.
 
We have long believed in the growth potential of life sciences real estate and built our own team, to advise clients in the space, way before the COVID-19 pandemic elevated the visibility of the sector to the general public. Equally, we remain confident that demographic and societal trends will support the PBSA and retirement living sectors through any temporary, short-term dislocation in markets.
 
Residential markets are impacted by government imposed restrictions during lockdown, as our Head of Residential, Charles Whitworth highlights.
 
Many build to rent investments are continuing to progress but greater caution will limit the supply of new opportunities and stall some transactions. With physical viewings very difficult to carry out and the Government advising deferral of completions, lockdown is having a very immediate impact on new homes sales and standing investment stock.
 
There are brighter spots, with appetite from Chinese buyers supported by digital marketing tools. We continue to believe alternatives will account for a significant proportion of the investment market in 2020, but no sector can withstand the short term impact of a shock of the scale of COVID-19. So volumes will undoubtedly be lower.
 
The fundamental appeal of the sectors should mean a reversion to an upwards trend once the shock subsides.

 


7 April

Will COVID-19 Slow the Rise of Alternatives?

Investors in specialist sectors such as student accommodation, retirement living, data centres, healthcare, co-working, hotels and residential are seeking to understand the impact of COVID-19 on the underlying operational businesses as quickly as possible.

Many investors have been immediately affected given their exposure to the operational cashflow of underlying assets. Operators are looking at short and long term impacts on their businesses and how these might affect their ability to turn to real estate investors to raise capital.

In the first of a two part series, experts in four of our specialist sector teams provide their assessment of the impact of the pandemic on their markets.

In total, Alternatives accounted for 38% of all property investment transactions in 2019. Cushman & Wakefield’s report “Broader Horizons” published last year set out 4 drivers of what seemed like an inexorable rise in Alternatives:

  • Demographic and structural trends such as an ageing population, more international study and the growth in data traffic.
  • Investors seeking yield in a “lower for longer” world.
  • Institutions wanting to access the long leases in areas of the specialist sectors to match long duration liabilities.
  • Conversely, other investors have wanted to get closer to the higher returns offered by rising operational incomes and become more adept at taking operational exposure.

The demographic picture remains positive so whilst the specialist sectors are not protected from the impact of the pandemic and some, such as student accommodation, have been more quickly impacted than some conventional sectors, we expect investors’ appetite to rebound in the medium term, driven by societal trends.

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