Across the world, private real estate is being challenged by a wide range of negative impacts arising from a covid-19 lockdown. In a report published last week, UBS Asset Management’s real estate and private markets business outlined both the challenges and opportunities that can be found in four real estate sectors and geographies that stand to be the most heavily affected.
- Chinese industrial
Impact: With China being the original epicenter of the virus outbreak, more industrialists will re-route their supply chains out of the country. UBS-AM REPM expects low-end manufacturing will start to exit China, impacting certain types of logistics facilities. The disruptions in the availability of intermediate production components, which has not been helped by the long period of factory closures, UBS noted, will prompt firms to diversify their exposure away from China.
Opportunity: UBS-AM REPM advises real estate investors to pivot towards investing in logistics facilities catering to e-commerce as well as high-end manufacturing and production facilities that will continue to benefit from China’s “Made in China 2025” plan.
- European hospitality
Impact: With tourism and travel ground to a halt, independent and smaller hotel chains will be majorly impacted by the huge drop in occupancy levels. UBS-AM REPM estimates the income streams of hotel investments that have a management or operational contract will be more affected than hotels with traditional leases.
Opportunity: Low investment volumes in the hotel sector could also lead to re-pricing and revised valuations.
- European retail
Impact: The precipitous drop in consumer sentiment and store closures will force retailers to cut rents and defer rental payments. Retail assets located on luxury streets will face bigger headwinds given the decline in tourism. Income returns from retail assets are expected to tumble given rental income is dependent on inventory turnover at stores, the report explained.
Opportunity: UBS-AM REPM expects to see distressed situations if income levels fall for highly leveraged assets. Within retail, supermarkets could turn out to be more resilient tenants given such retailers are typically less affected by economic cycles.
- US and Asia-Pacific office
Impact: While temporary office closures and market swings are not expected to have a significant short-term impact on US demand, UBS-AM REPM notes this is contingent on how soon a rebound happens. If diminished growth continues beyond the spring of 2020, the report cautioned, it could lead to a slower lease-up for office space.
Opportunity: Corporate demand for co-working or flexible working spaces is expected to get a boost in Asia-Pacific. UBS-AM REPM pointed out how most of the region did not have a huge mobile working culture before the pandemic. But in its aftermath, office tenants will be prompted to review their fixed real estate space requirements, the report notes, especially if mobile working leads to comparable levels of efficiency.