A place in the suburbs?
Enclosed is the latest ConduitRE weekly note on the impact of the Covid-19 crisis on the European real estate market, which is co-written with Independent Property Analysis, run by James Roberts, former Chief Economist of Knight Frank.
- Bond yields rise, as markets price in a rebound for growth
- What would a drift to the suburbs mean for property?
- Strong occupational demand necessitates speculative logistics development
Last week saw losses for bond investors, as yields moved out in anticipation of higher inflation driven by a return to growth. We are now past the anniversary of Covid switching from being a epidemic to a pandemic, and it is noteworthy that one year on from the onset of the GFC, no one was talking about an imminent return to growth. Back then, most newspapers were carrying black and white photos from the Great Depression era on their business pages. This downturn has been deeper, yet faster.
The vaccine rollout, while undoubtedly patchy in some parts of the world, is rejuvenating confidence in the outlook with surprising speed. Indeed, Soho House announcing plans to list with a top end valuation demonstrates investors’ desire to re-enter embattled sectors in anticipation of a rebound. Investors are now looking to gain exposure to the hospitality industry, and results from AirBnB showing surprising resilience appear to support the revival in confidence. The holiday lets firm said they: “expect there will be a significant travel rebound”. Even Accor conceded this week that “lifestyle will account for probably more than 20% of all the offerings of hotels in this planet over the next 20 years”. The company cited their deal with luxury brand operator Ennismore, whom will account for 25% of Accor’s pipeline fees.
The property sector should also note that Soho House and AirBnB are good examples of companies riding the wave of changing lifestyles in a tech-enabled world. Similarly, the flag carriers for this trend in real estate were coworking office firms, who have had a dreadful time during the pandemic. However, like the equity investors looking again at hospitality, we in real estate should review flexible offices with a fresh perspective.
If we are moving into a world where most firms do not have enough desks for a sizeable proportion of staff, what happens on the days when more people decide to come in than usual? We believe firms will in the future supplement the smaller HQ footprint with memberships of coworking centres. This would dovetail well with predictions that cities will now see populations drift into the suburbs and commuter belts in search of larger homes.
This would also require a change in the housing stock, and interestingly Conduit Real Estate has noted fast growing interest among investors and owner-occupiers in single family homes, particularly those with gardens. Feedback that ConduitRE got from agents in commuter towns close to London indicates that there has been a significant increase in interest from buyers who want to move from flats in London. This has led to multiple bids above asking prices in these locations.
Our experience is that this new interest in recovery play investments is so far less evident in commercial property. One major global investor told us that there are currently a lot of proposed speculative logistics developments trying to raise finance, particularly as the demand from occupiers remains strong and locationally dependent, but the risk/reward is markedly different for a lender as it is for the sponsor. Another investor told ConduitRE that they saw little point in assuming additional risk at a time when they could get higher than usual returns on relatively safe assets.
Nevertheless, there has been a steady increase in activity in the property market this year, which we believe will give way to more bullish deal making. Indeed, one lender told ConduitRE last week that for them, 2021 had got off to a “very strong start”, with a good flow of executable lending opportunities coming their way. Analogously, in New York City, one investor has just refinanced a $100 million loan on a Brooklyn office building, securing a lower interest rate and an extended term, while another investor is selling a large block of the remaining units at its Hell’s Kitchen new development for a substantial discount. This demonstrates the pressures currently faced by Manhattan’s condo developers.
Those in the property sector now need to think about what assuming a higher risk profile will look like for them. Is it sticking with the popular logistics market – one European REIT said it wanted to increase industrial in its portfolio from 34% to over 40% – but engaging in spec development? Or is it being more creative, and betting that this cycle could favour the suburbs over city centres?
The harbinger of a Bull market means making tough and counterintuitive decisions, but it is interesting one can now talk of an upcoming bull market without the risk of seeming unreasonably optimistic. Winston Churchill quipped: "The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty."