The real estate winners and losers of COVID-19
25 March 2021
Real estate investment success has been anchored in the daily patterns that have governed our lives for so long, but with the ‘work experience’ changing so drastically for so many of us due to COVID-19, what does the future of real estate investing look like? Mourant LP Partner John Rochester applies a global perspective to the real estate asset class and asks who the real estate winners and losers are going to be of people’s increasingly blended lives.
The COVID-19 pandemic has changed the lifestyles of many people around the world; the virus has affected the ways we interact, work and live. Many of us find ourselves in temporarily (or perhaps more permanently in some instances) altered circumstances but, with vaccine rollouts progressing and restrictions easing, it’s understandable to have an eye on what comes next and what our lives will look like in that most fabled of existences: ‘the new normal’ – perhaps better termed 'the next normal'. It is inevitable that lifestyles will be different but what impact will this have on the real estate asset class, whose fortune is inextricably linked to the way we live and work?
At Mourant we work with some of the world’s major banks and onshore law firms to support the structuring and financing of real estate deals, giving us a truly global perspective on the future of the asset class. Current wisdom suggests that the ways that our work and home lives intersect are going to be more complex than ever, and a blend of flexible working, remote working and office working is likely to be more commonplace. But for an asset class that relies on where we are and how we live, who will benefit from our newly blended lives – and who might not?
If the author and humourist Mark Twain felt reports of his death were exaggerated, he should have been around in 2020 to read some of the doom-mongering predictions for offices. If some of the more sensationalist commentators were to be believed, none of us would step foot in an office again; they would be gathering dust and preserved for all time as a monument to a moment in the cycle of the economy. These predictions are a good distance wide of the mark, however.
It is true that the way we use office space is going to change, and this is certainly being borne in mind by fund managers, but there aren’t many signs that offices are being abandoned altogether by real estate funds and investors.
Our blended lifestyles will likely be characterised by flexible working, for those who are able. This means some time in the office, and some time working remotely. It’s therefore logical that some companies will look to downsize and have fewer desks. This is not a new phenomenon, however; audit firms, to take one example, often have half of their workforce working elsewhere, so may only have office capacity for 70% of their total workforce. It is likely that some other industries may now follow this lead.
Another case for the defence on office space is that the pandemic has – quite rightly - refocused the corporate lens and wellbeing is far higher up the agenda. Fewer desks may well be the consequence of our blended lives, but that space could house break-out spaces, canteens, yoga rooms or co-working facilities instead, fostering a more proactively collaborative working environment.
(High street) retail
Another trend that was already underway but has been hastened by the pandemic is that of the demise of physical retail. The case of Arcadia is perhaps the perfect parable for the plight of the high street in 2021: well-known brands (Dorothy Perkins, Burton, Topshop et al.) being sold off to online retailers (ASOS and Boohoo) who take ownership of the brands and the inventory but close the physical shops.
The rise of ecommerce has certainly left gaps in the traditional high street in the Channel Islands, the UK and around the world. Traditionally real estate funds have been more heavily invested in shopping centres than the individual shops on your local high street, but nonetheless the fact that more of us are shopping online will have an impact on rent returns and the viability of future retail ventures.
The capital remains a hotbed for property investment; its light has not been dimmed by the pandemic. But one area that might experience a short-term slowdown is apartment blocks.
With unemployment on the rise, especially among the young, and wages being either depressed or remaining steady, it seems unlikely that demand for apartments is going to remain at pre-pandemic levels. COVID-19 has driven workers and residents out of London and the possibilities for remote working mean that some may not return – at least not in a way which requires them to have a residential base in the city.
That being said, London property supply was not meeting demand before the pandemic, so there is scope for catching up. The capital will always be a cultural and professional hub, so real estate investors are unlikely to be deterred for too long.
The flip side of the high street coin is that online retail is booming. According to the IMRG Capgemini Online Retail Index, online sales in the UK were up 36% year-on-year in 2020, the largest annual growth since 2007. Unable to go out shopping, it’s no surprise that people went online for some retail therapy.
With ecommerce showing no signs of slowing down, the future investments of choice for many real estate funds are going to be the infrastructure that enables online retail. That means that warehouses, fulfilment centres and distribution centres are all in high demand and will likely continue to be.
One of the consequences of blended work and home lives is that home connectivity needs to be greater than ever before. Telecommunications providers no longer having the luxury of providing high-quality connections to a city centre or business district and adequate connections to people’s homes; fast, resilient and reliable connections are needed everywhere.
This demand has led to a rapid rise in the building of telecoms exchanges, mobile phone antennas, data centres and cloud storage server facilities. With more and more of us working online and needing seamless access to files, data and our colleagues the infrastructure needs to keep up.
Again, this was a trend that was already underway, but the acceleration in the use of software such as Zoom, Office 365 and Webex means that even more data is being transmitted across our telecommunications networks, from a greater variety of locations.
UK regional property
If London, and other major cities around the world, has experienced outward migration, then the upshot of that is that the UK regions have made population gains. The expected reality of flexible working for more of the workforce means that a flat in London may no longer be a necessity when the worker can buy in Bedford, Brighton or even further afield, and commute in for one or two days a week of office-based work.
Areas with good transport links may therefore see a population boost and that presents an opportunity for developers to build apartment blocks, first time buyer developments and family homes.
As the workforce looks for a better work/life balance in a post-lockdown world the desirable areas of the UK’s green and pleasant land will become even more attractive. Cornwall, Suffolk, Warwickshire, North Yorkshire and the other desirable areas of the country will have a greater number of house hunters than they did before, crucially from a broader demographic than before.
In the Channel Islands, of course a prime example of these desirable locations, there is already evidence of inward migration which will lead to long-term population growth and an impact on the housing market.
Another trend which may experience a post-pandemic boost is moving work to other UK cities. Some companies have for several years been basing large numbers of employees in places like Leeds or Birmingham and having them do ‘London work’. The benefits are clear in that the overheads are lower thanks to cheaper rents and not having to pay London wages; and the perks for employees are that they avoid the cost of living in London. This could result in office space in other UK cities maintaining its appeal for real estate funds.
How society builds back from COVID-19 will clearly have a huge impact on the future success of real estate funds. It is truly an asset class that is shaped by our behavioural patterns and sociological factors as well as economic ones. What is clear is that volatility creates opportunity and fund managers are constantly re-evaluating where and how to invest.
Our blended lives are changing the composition of real estate funds, it remains to be seen how they will impact the funds’ fortunes.
For a global, future perspective on real estate funds get in touch with the real estate team at Mourant.