Private Assets

How global real estate can recover from COVID-19

In Conversation with Zsolt Kohalmi, Global Head of Real Estate and Co-chief Executive Officer, Pictet Alternative Advisors

How global real estate can recover from COVID-19

This content has been produced by Pictet Wealth Management in collaboration with the Commercial Department of The Financial Times.

In April, a Canadian asset management company made what appeared to be an outrageously bold move. It listed a London office block for a record £1.8bn — at a time when Covid-19 was still roiling the global property market, and as many people continued to work from home with no plans to return full-time.

Whether the skyscraper ends up selling at that price tag, it shows that optimism is returning to certain corners of the real estate market as the world emerges from the pandemic. 

Real-estate assets under management rose to a record $1.1tn last year even as global deal volumes fell, according to Preqin, a provider of data and analytics for the alternative-investment community[1].

“In spite of near-term uncertainty, the long-term appeal of real estate has held for investors,”[2] noted Savills World Research.

Zsolt Kohalmi, Global Head of Real Estate and Co-chief Executive Officer at Pictet Alternative Advisors, agrees with the trend but expects the market to bifurcate – with winners and losers coming out of the pandemic that may ultimately affect how buildings are used in the future.

Offices: Premium will prevail 

Demand for office space stalled last year as the pandemic forced companies to shut headquarters and working from home became the norm.

CBRE, the commercial real-estate services and investment firm, reports that office-leasing take-up in Europe fell 40 per cent in the first three quarters of last year compared with the same period in 2019. It expects the demand side of European office markets to continue to weaken this year, with overall vacancy rates rising[3].

But not all office blocks are expected to suffer the same fate.

According to Kohalmi, premium properties that entice workers to return to the office, share ideas and innovate will likely be more in demand than offices in less prime locations, with no innovation or special attraction.

“Innovation through video conferencing is very difficult because you don’t have those all-important chance encounters with colleagues,” he said. “Work socialisation is also very important to provide balance in our lives, and that is best achieved in offices.”

Homes: Demand for air and space

The desire for healthier environments is also driving a divergence in the housing sector. For example, the value of ground-floor flats that open into gardens has topped the traditionally more desirable upper-floor units as demand for outdoor space rises. Likewise, properties with dedicated work areas are selling faster than those without.

The pandemic has also accelerated an exodus from expensive capitals such as London and New York to more affordable second-tier cities.

One recent study estimates as many as 700,000 residents left London last year[4], while around 10 per cent of people in Madrid, Milan and Berlin said they had moved out at some point during the pandemic[5]. “Cities that want to prosper need to take into account affordability,” said Kohalmi.

Hospitality: the biggest loser

The hospitality sector suffered a strong but cyclical hit during the pandemic as repeated lockdowns forced restaurants and bars to shut, and travel restrictions left hotel rooms empty.

Even in Asia, which bounced back relatively quickly, recovery is expected to be slow. A recent PwC report on the region’s hotel sector predicted that “with domestic sales unable to offer sufficient scale to soak up pre-Covid levels of both international tourists and business travellers, the hotel sector is facing an overcapacity problem that will doubtless see a number of assets removed from the market”[6].

Kohalmi believes that it may take up to three years to return to pre-pandemic occupancy levels. But even here, recovery will not be uniform, with high-end leisure hotels likely to recover faster than other areas of hospitality. Business-focused hotels, in particular, may suffer as people conclude that video conferencing can be a workable substitute for travel.

Retail: Repurpose and reinvent

Brick-and-mortar retailers were already hurting from the rise of e-commerce when Covid-19 struck, accelerating a demise that would have taken years and turning it into a question of months.

Kohalmi says the glut of empty retail spaces can be repurposed. For prime retail spaces, reinvention will mean more space dedicated to everything health related. “The pandemic has made us more conscious about our own health. We expect to see more clinics of all sorts, as well as more gyms and places dedicated to wellness.”

As for spaces located slightly further from the centre, Kohalmi believes they will increasingly cross over to residential use.

“Ground floor, lower ground floor, all of these work for filling the shortage of residential properties,” he said. “The best councils will designate a key area that they want to keep as a high street, and then let the rest become residential.”

Logistics: the ‘last-mile’ opportunity

Meanwhile, the rise of online shopping has created a booming global market for fulfilment spaces and other logistics real estate. According to California real-estate investment trust Prologis, demand for modern logistics space will rise by 3-4bn square feet or more over the next business cycle.

Logistics is one of the real-estate segments that holds  strong post-pandemic potential. “It’s basically all about the last mile,” says Kohalmi. “Everybody has grown used to internet shopping, which means that those packages that miraculously arrive on everybody’s doorstep several times a day need to be fulfilled from somewhere.”

More on real estate: https://www.pictet.ft.com/

[1] https://www.preqin.com/insights/research/quarterly-tearsheets/preqin-quarterly-update-real-estate-q1-2021-tearsheet

[2] https://www.savills.com/impacts/market-trends/real-estate-investment-in-2021-global-outlook.html

[3]  https://www.cbre.co.uk/research-and-reports/2021-EMEA-Real-Estate-Market-Outlook

[4] https://www.escoe.ac.uk/estimating-the-uk-population-during-the-pandemic/

[5] https://www.nytimes.com/2021/02/11/world/europe/workers-europe-cities-pandemic.html

[6] https://www.pwc.com/sg/en/publications/assets/page/emerging-trends-real-estate-asia-pacific-2021.pdf

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