The Covid-19 pandemic has caused disruption across asset classes, and office real estate markets are “by no means immune”, but due to their illiquid nature it could take several months or longer for data showing the true impact of the virus, a recent study by UBS Asset Management has claimed.
New occupational demand will drop away significantly this year, and a market recovery next year remains uncertain, according to the Swiss firm, which has also called on the real estate industry to focus on “going green” in a separate report.
Adeline Chan, research and strategy, real estate and private markets, said: “Real estate cannot stay business as usual. Acting to prevent and protect against global warming will become increasingly imperative in real estate investment management.”
The Covid-19 pandemic could raise the urgency for greening the built environment, the study suggests.
“While the climate emergency is not directly comparable to the ongoing global health pandemic and its resulting disruption and damage, the effects of global warming will eventually have a significant impact on global supply chains, food production and ultimately, human lives. Real estate cannot stay business as usual,” Chan added.
Although the report focused mainly on the Asia-Pacific region, its points are valid across the board, the asset manager said in a statement.
According to Aviva Investor’s Marc Versey, chief investment officer of real assets, focusing on prime assets in core locations can help remove the risk of short-term volatility – “that can be an advantage of real estate in difficult times”.
“We have had a movement of clients into real assets as a result of volatility before, as the relative stability it can offer in long-term cash flows comes home in periods of uncertainty.”
If the hit taken by sectors such as travel, hotels, hospitality and leisure become a long-term issue, however, this will have a knock-on effect on real estate pricing, the CIO believes.
“You may have a delay as decisions are put on hold. That is going to have a short-term impact, but the long-term impact is less clear. Our main concern in real estate is tenants we have let to being badly hit by the effects, and that’s where we’re really focusing,” he says.
“Changes in capital flows – I do think, down the road, we will be able to demonstrate a defensive quality in real estate and real assets more generally, which investors are likely to seek in difficult periods. We have seen this in the past, and we have seen flows into real assets as a result.”
It’s not a time for complacency – staying alert is crucial. It’s a similar story across asset classes. Invesco’s director of client portfolio management, Douglas Rowlands, warns that real estate owners will need to be reactive over the short-term.
This means engaging with tenants more on their day-to-day activities, ensuring assets maintain their function and cash flows, “but the long-term fundamentals of good property, in terms of quality of location and providing the space that
When factoring in recession risk, according to Versey, which areas of the market could be affected need to be considered – “it’s quite nuanced”.
“You have to look very much at geographies and cities – what are those locations set up to do, is there a big industry around a certain city and could that industry be hit? Are these cities set up for the future?” he asks.