Real estate investment in a post-Covid world

“Residential for rent is where I see a lot of capital chasing product, given the affordability constraints of buying vs. renting. The investment in this sector is typically supported by (1) housing formation / demand growth, (2) undersupply due to lagging construction, (3) under-invested / under-managed (current) stock, and (4) resilient cashflows.”

Paul Nearchou, director at a London-based private equity firm that is a major international investor in real estate, sees a number of trends increasing as we emerge from the pandemic crisis.

Q:What are the major overall changes to investment in the post-covid world, and how will they evolve in the future?

A:The reality is we have still not fully seen the impact of Covid on the market. So, this is a very difficult question to answer. That said, what we can say is that Covid has accelerated existing trends, with real estate investors increasingly focusing on:

• Customer-centric real estate: This is referred to as the “hotelisation” of real estate, to become more service-oriented and customer focused. This means more hands-on, operational management with close attention to customer experience, and less of a traditional landlord-tenant relationship. The view here is this would increase tenant retention and result in higher rents.
• Innovation: Innovation refers to the need to invest in technology across all asset types to improve efficiency, support property management and future-proof assets.
• Secular trends: Focus on long-term growth trends, for example the growth of logistics with the rise in e-commerce or healthcare given our ageing population.

Q:Residential investment seems to be focused on particular property types?

A: Residential broadly defined including single / multi-family for rent, for sale and student accommodation have gained increased attention. This is underpinned by demographics and social  urbanisation trends.

Particularly, residential for rent is where I see a lot of capital chasing product, given the affordability constraints of buying vs. renting. The investment in this sector is typically supported by (1) housing formation / demand growth, (2) undersupply due to lagging construction, (3) under-invested / under-managed (current) stock, and (4) resilient cashflows.

Q:Has remote working changed real estate investment?

 A:The key question we are going through at the moment is what is the true impact of working from home for the core office locations.

On one side, I am a strong believer in the importance of a workplace in building team cultures, and creating environments for individuals to learn, grow, and develop. That said, I also see a trend of flexibility and that a more hybrid working life will be the “new normal”; as on the whole we have seen that working from home can work!

An interesting trend I see for offices is the flight to quality of occupiers, as they focus on sustainability / amenities / wellbeing. In other words, employers need to give a reason for their employees to be in the office (apart from just the work). I expect investors / investment to follow this trend, both to attract occupiers but also to ensure assets remain liquid / in demand at point of sale. This also aligns with the ESG trend / focus that you are seeing from institutional investors.

 Q:What is your view on healthcare real estate post-covid?

A: Definitely a sector I am doing more work on, and I see an increasing number of investors looking into this space.

The care-home sector is typically more complex given the care aspect (and associated regulation), so a larger proportion of investors are targeting assisted-living / retirement living concepts. This is underpinned by ageing populations (in 2020, about 20 per cent of the EU-27 population were aged 65 and over), who are living longer and typically have significant equity built up in their family homes.

Q:What trends for hotels?

I believe in long-term leisure consumer trends, which is why I expect a relatively quick comeback of leisure-focussed hotels. Conversely, I would argue business travel is unlikely to go back to pre-covid levels (given the rapid and pretty seamless adoption of the video-calling programs), and foresee continued challenges in the short to medium term for conference driven assets.

Following this, I see a good opportunity for value investing backing the combination of pent-up demand of consumers and long-term growth of leisure travel. In the short-term, as travel remains relatively difficult and expensive, given the on-going restrictions – I would be targeting staycation platforms.

These are typically hotel groups or leisure companies that concentrate on domestic leisure (see Blackstone’s purchase of Bourne Leisure, a leader in the UK holiday market with the brands Haven, Butlin’s and Warner Leisure Hotels as an example).