The long-term resilience of real estate – The Property Chronicle
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The long-term resilience of real estate

The Fund Manager

Monopoly houses balanced on one pound coins

Beware of hasty and alarmist predictions. This crisis does not call into question the sector’s fundamentals and key trends. The current period is however a good opportunity for a strategic deepening of landlord-tenant relations.

In such unprecedented circumstances, it is still difficult to accurately predict the impact of COVID-19 on real estate. Nonetheless, we do not consider this crisis a threat to the sector’s resilience and its underlying long-term trends: growth of large metropolitan areas, the appeal of city centres and transport hubs where demand exceeds supply, urban densification with taller buildings to curb urban sprawl and promote sustainable development.

Urban exodus?

Despite new health concerns, the widely predicted urban exodus, with people shunning big-city apartment blocks in favour of country homes with a garden, is somewhat perplexing. Over the past few decades people have increasingly turned their back on rural areas for far-reaching sociological and economic reasons. In addition, there are very often personal and family obstacles preventing such relocation.

The limits of teleworking

Teleworking, which it is claimed will affect office space, also clearly has its limits, including its incompatibility with family life over the long term. In any event, working from home will not exceed one to two days a week. While this crisis will cause us to reflect on the best way to use space, we remain “social animals”, attached to our workplace. We like sharing, and appreciate impromptu meetings, where we sometimes have our best ideas.

Low price visibility

Much has also been said and written about prices. It is however too early to assess how they will change. In concrete terms, we can only talk about price decreases or increases on the basis of actual transactions. However, they were lacking throughout the lockdown because of the ban on visits and technical audits and the number of transactions in recent weeks has been too limited for any real trend to emerge. Moreover, recently concluded transactions or agreements to sell will only be registered in three months. This applies to residential real estate as well as to offices, shops and logistic premises. Incidentally, this represents a problem in terms of market transparency and efficiency.

Shortage of supply

Although a crisis without a fall in prices seems inconceivable, we nonetheless believe that it will be limited, in particular in the case of residential real estate. We must bear in mind that large metropolitan areas continue to be characterised by a shortage of real estate assets and strong demand. This trend was borne out in the 2008-2009 crisis, when the correction was minimal. For various reasons, the public authorities are only wiling to increase supply cautiously. Supply is also limited by numerous administrative constraints. Residential real estate, which remains in short supply, is more resilient for longer than other asset classes.

Win-win arrangements

The ability of office and retail tenants to meet their lease obligations will, of course, be key for the stability of investments and the market over the coming months and years. In this regard, it is important to emphasise their lack of opportunism during the crisis. Requests to defer and even cancel rents were in almost all cases justified by exceptional circumstances.

This crisis has confirmed the strategic need to build a close relationship with client-tenants and maintain regular contact with them, since the best tenant is the current tenant. Tenants are often grateful for the gestures made towards them by owners in complicated situations. A rent reduction can also be granted in exchange for a lease extension in a win-win approach. All in all, this crisis represents an excellent opportunity to put landlord-tenant relations on a new footing for the long term and in the interest of our investor clients.

The Fund Manager

About Pierre Jacquot

Pierre Jacquot

Pierre Jacquot is CEO of Edmond de Rothschild Real Estate Investment Management with over 25 years of experience in real estate. He also supervises directly Fund Management activity in Switzerland. After founding Orox Asset Management in Switzerland in 2007, Pierre Jacquot actively participated in the launch and the development of the Edmond de Rothschild Real Estate Swiss SICAV fund. In recent years, he has contributed to the integration of the investment and asset management entities in Germany, the United Kingdom, Benelux and France. Since September 2018, he has been a member of the Executive Committee of Edmond de Rothschild Asset Management.

Articles by Pierre Jacquot

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