April 8, 2020 infosol

Undercurrent 3: The Biggest Blow to The Retail Real Estate Deal Flow

19 Undercurrents with Ramifications That Go Beyond Twenty 20

Global Real Estate Markets

  • One of the hardest hit industries as a result of pandemic will be the real estate market
  • Usual suspects (UHNWIs, few SWFs, PE and family businesses) will continue to look for bargains
  • Major outflows from property funds of global asset managers in motion – many frozen their funds
  • Arrival of hybrid vehicles: hedge/vulture funds: “marriages of convenience” on the horizon
  • $170bn of pre-pandemic dry powder in real estate will be ever more confused for new deals
  • Co-working, will have a few hard years ahead in short/mid term: ”social distancing impact to last”
  • Pressures on high-street retail and community real estate markets will be substantial
  • Spring/Summer season for retailers is gone, Fall/Winter season even a harsher investment season
  • Major fashion groups will go into administration and will break lease agreements or sell properties
  • Net asset values in real estate market are in for a hard reckoning in the next 12-18 months

 Keep an Eye On

Moving forward repurposing and repositioning of real estate is the name of the game. Many of so called “innovations” over the past decade or so have resembled more of a plastic surgery. Yet the sector needs a kidney transplant this time around.

Some department stores, fashion brands, and anchor tenants will fold, and as a result smaller operators and high number of F&B groups will have to follow. Cities, councils and municipalities must adapt to new realities and show much greater flexibility in planning applications and much more agility in responses to approvals.

Prefab and modular technologies that can help these new spaces to transform rapidly and cost effectively will be in demand. During the lifecycle of any tenancy agreement repurposing and repositioning will have to be a new key clause for future tenants and investors.

At a broader and bolder level consider Heathrow Airport. Many of its airlines are asking for government bailouts and fighting for survival. Virgin, BA, Ryan Air and Easy Jet are subject to massive staff cuts, and shrinking in size. Many duty free tenants/brands like Carluccios’s have already unfortunately waived Arrivederci!

With the superb connectivity of Heathrow Express why not be a bit playful and to repurpose one of the terminals to a superb, LEED Platinum certified progressive residential project for those who have to continue to fly frequently in and out of London even in a post pandemic world?

Vertical farming in the city centres will be big, shortening the time to supply of fresh produce, the surge in data centres as a result of many things going online, and also click and collect, and distribution infrastructure will be some of the new wild cards to keep an eye on.
The future real estate market needs not only capital and property but also creativity and patience in developing and curating new spatial relationships between societies, buildings and capital.

The heavy debt residing in the sector could cause hernia for future investors who may get too excited too quickly. For SoftBank, investment in WeWork was supposed to be similar to lifting up a nimble martial artist to new peaks of success, yet WeWork turned out to be a Sumo wrestler and rather a painful experience!

Ali Borhani is the Managing Director of 3Sixty Strategic Advisors Ltd. It is the readers’ responsibility to verify their own
facts. The views and opinions expressed in this article/commentary are those of the author’s and do not necessarily reflect the official policy or position of any other individual, agency, organization, employer or company.