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Ongoing covid-19 crisis has increased appetite for distress

A growing proportion of investors are focused on more distressed and opportunistic strategies, according to James Jacobs, head of real estate for Lazard’s private capital advisory group.

Jacobs: opportunistic strategies are seeing greater interest from investors

January has seen a continued increase in investors seeking to deploy capital into real estate with distressed characteristics. Twice as many investors are looking at distressed and opportunistic strategies compared to those focusing on the next most popular category.

As we enter 2021, there appears to be growing interest in strategies such as opportunistic equity, with investors focused, first, on providing rescue capital. Second, they are looking to recapitalize assets, portfolios and platforms in need of liquidity. Third, investors are considering sectors that are clearly dislocated – for example, those parts of the hospitality industry hit particularly hard by the covid-19 pandemic.

In 2020, immediately following the first wave of lockdowns, many investors expected to see an increase in the volume of distressed deals. However, this did not materialize as anticipated. The economic impact of covid was, and remains, mitigated by government intervention. Globally, governments allocated more than $10 trillion of support in just two months following the onset of the pandemic in 2020, triple their spend during the entire 2008-09 global financial crisis. This liquidity, combined with measures such as furlough schemes, business loans and a moratorium on evictions has, unsurprisingly, delayed the true economic impact of the pandemic.

Nonetheless, the economic damage caused by the pandemic continues to be significant. For example, the US has seen its largest decline in economic output ever experienced and government debt has risen to 131 percent of GDP from 109 percent in 2019. In many countries, widespread redundancies have caused unemployment to reach record highs, more severe than in both the 1980s recession and in the GFC. Investors, prompted by lead indicators such as reduced economic output, unemployment, corporate bankruptcies, loan defaults, rental delinquencies and a rise in special servicing, now anticipate an increase in distressed dealflow.

Positive news regarding the rollout of the covid-19 vaccines should result in the start of some economic recovery during 2021. This, in turn, is likely to lead to government support measures being gradually reduced. As pricing adjusts, there is likely to be an increase in distressed property opportunities and the capital raised from investors into opportunistic strategies may well start to flow into the transaction market during 2021.