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Posted by Macquarie Asset Management
July 1, 2020
David Roberts
Rod Cornish
Beyond any near term COVID-19-related disruptions, cap rates and pricing are likely to recover to their end-2019 levels over a 2-3 year view, excluding retail and leisure segments that are heavily exposed to discretionary spending. Low and negative interest rates in developed markets, elevated property yield spreads to 10-year government bonds and expanding central bank balance sheets may support a swift recovery in pricing and liquidity of real assets as and when global macro risks stabilise.
This ongoing shift is likely to continue being a positive for modern and large distribution warehousing facilities and infill units serving large urban consumer populations. The acceleration in online shopping for groceries and other essentials is expected to be sustained in the post-COVID environment. More services-based consumer spending may also take place online including student education, visiting doctors and other health related activities such as personal fitness training.
As importers, manufacturers and governments look to minimise the impact of future shocks on production and day-to-day operations – particularly essentials including pharmaceuticals, medicines and personal protective equipment, and defence and security related goods. Increased near-shoring and re-shoring of production is likely to impact warehousing and industrial demand in and around major ports and major distribution hubs, while the ongoing shift to automation may impact jobs growth in manufacturing and transport industries.
Over the medium term, demand for data centres is likely to remain elevated relative to global GDP supported by structural secular tailwinds, including the adoption of cloud computing by both consumers and businesses. Internet usage has jumped as lockdown orders keep more workers in front of their computers. Continued higher levels of working from home post COVID-19 should support this shift.
A more moderate pace of population growth in global gateway cities may alleviate some of the pressure on public transport and infrastructure spending, allowing governments to focus on social and affordable housing, education and health services.
If working from home becomes a more viable option for office-based employees – even a couple of days a week – housing demand may shift towards larger housing in decentralised locations. Coastal property and single-family rentals, and more affordable suburban markets may benefit the most as long commutes – either by car or public transport – become less of an issue for many workers.
As tighter social distancing restrictions may result in employers increasing the amount of office space they allocate per worker, reversing a three-decade downward trend that has been seen in global gateway cities, such as London, Paris and Sydney. This is a positive for overall demand and may help to offset some of the other structural influences on the office sector over the coming years, including the shift to working from home.
Employers may diversify their occupier footprint across cities and markets in the post-COVID-19 environment, including a shift to multiple office hubs to minimise the impact that future shocks may have on day-to-day operations. This is likely to be a positive for fringe central business districts and suburban locations and regional office markets.
Landlords are likely to be more cautious in leasing space to flexible operators given the obvious risk associated with funding long-term obligations with short term revenues from small businesses and self-employed workers. These revenues quickly disappear during downswings, exposing owners to higher default risks. There could be a shift back towards the traditional model where space is directly leased to corporates in gateway markets.
Given the nature of the COVID-19 shock, the communal and networking element of co-working and co-living real estate space where like-minded people can interact and discuss new ideas and opportunities and socialise could come under significant pressure going forward. The shift to working from home and online services including education could facilitate this shift, even if a vaccine is discovered.
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