There is barely a facet of life that has been unaffected by the coronavirus pandemic. One of its most visible impacts has been on the use of real estate – shops and pubs have shut, offices stand empty and housing market activity has slowed to a trickle. Whilst a short-term hit to real estate performance is inevitable, the long-term story is more nuanced. Performance will depend on how well aligned an asset, a location and a portfolio is to the structural changes that the pandemic will generate or hasten. To preserve and enhance value, investors must identify the themes which are changing real estate demand and allocate accordingly.
Let’s take retail to illustrate the dramatic impact of fast-moving structural change on real estate. The pandemic has prompted an explosive consumer shift from physical to online shopping (see Chart 1). This shift was underway before COVID-19 struck but it has been accelerated from perhaps five to ten years to a matter of months. Historically high online penetration rates may not hold when normality resumes, but they will settle permanently at much higher rates. This has major implications for retail and logistics real estate.
Chart 1: E-commerce explosion: UK online retail penetration rate