As countries emerge from lockdowns and roll out vaccination programs, the private real estate industry is in risk-on mode as it looks toward a post-pandemic recovery. At the inaugural PERE Global Summit, held virtually this week, delegates said they had multiple reasons to worry.
One risk was the potential end to government support programs, which have helped many Main Street businesses to stay afloat. “There’s a big difference between Wall Street and Main Street,” said Robert-Jan Foortse, head of European real estate at APG Asset Management, during the “Mapping recovery scenarios and markets across Europe” panel on Wednesday. “On Wall Street, everything seems to be fine. But I have a lot of friends who work on Main Street, and I can tell you things are not fine. And they really need the government support programs.”
Foortse said he hoped those programs would be extended on the basis that vaccination programs would soon bring the crisis to an end. However, “I also see a lot of governments being under pressure to stop some of these programs,” he said. “At some point, somebody needs to pay back all that money they’ve been borrowing.”
In addition to the potential distress that could arise from a reduction in government support, fellow panelist Neil Slater, global head of real estate at Aberdeen Standard Investments, worried about “an awful lot of capital that is looking at real estate and infrastructure,” and the resulting economic implications for the asset class over the next 12 to 18 months as it concurrently experiences accelerated structural changes.
He was also concerned the celebratory mood over the end of lockdowns and ongoing vaccination rollouts was premature. “Are we really coming out of lockdown?” Slater asked. “What happens if lockdown comes again and you get this stop-start? What does that do to this idea of a clear recovery for the macroeconomic environment and ultimately real estate?”
Meanwhile, inflation is always a big worry for APG’s pension fund clients. “Short term, I believe there has to be some spike in inflation over the next six to 12 months,” Foortse remarked, given the anticipated surge in consumer spending. He also observed that a shortage of workers and raw materials have been driving up construction costs, which would have a negative effect on real estate. “With construction costs rising, replacement costs are rising and, in that sense, will also have an impact of the pricing of existing buildings,” he said.
As for Andrea Orlandi, head of European real estate at CPP Investments, another concern is the elevated risk in real estate investing. “You could say the equity element of real estate risk has grown, and the debt element within real estate has subsided,” he observed. “In other words, there’s more operating risk to real estate.”
Orlandi added that in the past, the industry had benefited from there being no alternative to brick-and-mortar real estate: “If you want to shop, you go to a store. If you want to work, you go to the office. The digital world has now given you an alternative.”
The demand for bricks-and-mortar space therefore is much more volatile now. But in a low-interest-rate, low-growth environment like Europe, that greater volatility does not necessarily translate to higher returns, Orlandi added. “I always think on a global basis, if you take the sector specifics and you take the macro specifics, it’s a tough place to invest today,” he said.