COVID-19 spurs change in non-listed real estate

With its theme of Reinvention for resilience: getting ready for the new normal, one of the most important questions for the INREV Annual Conference 2021 was how the COVID-19 pandemic would impact non-listed real estate in the longer term.

Early in the conference and setting the scene for much of what followed, one session was devoted entirely to this question, asking what structural changes will follow the pandemic and what the implications could be across the real estate sectors.  

In a poll during the session, more than half the audience identified residential as the sector where investment was likely to increase most over the years to come, followed by logistics in second place.

Putting the case for the ‘beds’ sector, Cristina García-Peri stressed that residential had shown its resilience as an investment through the pandemic as occupancy rates had remained strong. She noted that residential was the second most popular sector for investment last year after offices, reflecting its long-term potential, which is based on factors such as a highly diverse tenant base and inflation-linked income. This makes it more attractive than bonds, for which it is increasingly seen as a substitute. García-Peri also emphasised that residential is becoming a more sophisticated product with a wider range of amenities and services than in the past.  This is part of a trend towards ‘hotelisation’ – an idea that proved to be a strong thread running through the whole conference.

Rob Wilkinson admitted that preaching the value of logistics was not the hardest job at the conference, considering that online sales have accelerated during the pandemic, a trend that shows no signs of slowing any time soon.  The difficult task for investors will be identifying the right locations as the urban landscape changes and in keeping up with the growing technological sophistication of facilities, such as the coming of ‘dark stores’ and greater use of robotics.

García-Peri also emphasised that residential is becoming a more sophisticated product with a wider range of amenities and services than in the past.  This is part of a trend towards ‘hotelisation’ – an idea that proved to be a strong thread running through the whole conference.

However, Wilkinson cautioned against seeing the pandemic as the death-knell of physical retail, which he said could bounce back later this year.  Andrew Vaughan suggested that retail is going through a period of ‘creative destruction’, in which the creative part often gets overlooked.  While the move online has undoubtedly accelerated through the pandemic, successful retailers already recognised the distinction with offline as largely irrelevant.  Insisting that retail remains at the heart of the urban fabric, he argued that even if in future people want to consume in more sustainable ways, they will still want to come together in city centres.

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Offices will also have to change if they are to succeed post-COVID, suggested Bernard Penaud, and this again looks set to be towards the concept of ‘hotelisation’.  If workers are to be attracted back to these buildings the office space will need to embrace the kind of innovations made by WeWork and the like, providing more relaxed, flexible and engaging environments. Younger generations have tended to find the need to work from home through the pandemic less positive than many of their older colleagues, but some employers will increasingly ask whether they need offices at all.

Offices will also have to change if they are to succeed post-COVID

There are clearly also many inter-sector connections that will get more important post-pandemic, something that moderator Greg Clark drew out in the panel discussion later in the session.  García-Peri noted how more flexible working patterns could mean new types of layout for both residential and office space, while retail could encompass more co-working areas as an alternative use in some buildings. Meanwhile Vaughan emphasised retail’s synergy with residential in providing daily goods, given that essential retail – which had remained open through lockdowns – had proved more resilient than the rest of the sector.  There are also possible cross-overs between logistics and retail parks, where click-and-collect is proving an increasingly important form of fulfilment.

If there was one thing that all speakers at the conference agreed on, it was that the pandemic means that nothing in non-listed real estate will ever be quite the same again

Many of the ideas that surfaced in this session were echoed elsewhere in the conference.  In her fascinating opening talk on ‘economic recovery in a vaccinated world’, Linda Yueh noted that Europeans had proved to be highly flexible in adopting teleworking, something that would likely remain key to a number of the office and residential trends noted above. The idea of ‘hotelisation’ was again prominent at the start of Day 2 in a session entitled ‘Who’s the client?’ With the implication that the occupier is the principal client for real estate, Ilkka Tomperi argued that ‘real estate is no longer about satisfying needs but about creating desire’, while Jos Sente coined the phrase ‘living as a service’.  These trends look set to gain additional traction given the disruptive impact of COVID-19 on the use of retail, office and residential space.

If there was one thing that all speakers at the conference agreed on, it was that the pandemic means that nothing in non-listed real estate will ever be quite the same again. In the final day’s session on the evolving institutional investing landscape, Jenny Buck stressed that COVID had made it crucial to work with tenants to help them through the crisis in order to secure investment income over the longer term. This is one more sign of real estate becoming more operational and will require different skills from those of the past.  New skills will also be key to facing up to ESG and the climate agenda. But perhaps most importantly, COVID has reinforced the need for real estate teams to be aware of tail risks when underwriting their investments, something that they might have started to forget.  

You can replay the recording of this session, ‘Operating for success: Sector picks amid structural change’ via the INREV on-demand library.