-Hello! My name is Anel Kussainova! Thank you for your interest and questions!
Within the “Ask an Expert” column let us introduce you the next guest of our interview - Miras Abdukhalikov, Vise President of the Private Markets Department.
For your convenience, we have prepared a video interview where we discussed the impact of COVID-19 pandemic on the real estate market.
- Miras, the real estate market is the most “tangible” asset class to most investors around the Globe. What is the key impact that the pandemic had on this market and how long do you think it will last?
- Thanks Anel. Yes, real estate is one of the well-known investment classes because of its physical attributes and other easy-to-understand features. In the spring of last year, the impact was clearly seen – empty office spaces, empty hotels and malls were vivid scenes in almost every key metropolitan areas around the world. However, city lockdown orders affected different real estate sectors differently. For instance, the COVID-19 pandemic introduced mass implementation of home offices that corresponded with lower demand for traditional offices. At the same time, the mass vaccination and back-to normal trend that are occurring right now around the globe will revisit the number of offline workers in every office, but is likely to keep the total demand for the office relatively steady given the higher need in the amount of space per person.
- And what about the retail industry?
On the other hand, the positives and negatives were seen in the retail industry as well. Similar to the office sector, the impact turned out to be quite diverse. With the traditional stationary retail heavily hit by the lockdown, online sales raised immensely at the peak of the pandemic. The use of online delivery warehouses or logistic spaces by online retailers was already in high demand even before the pandemic, while the lockdown rules further raised the need in the sector. Also, at the peak of the shutdown, the luxury shopping was almost non-existent, while the use of buildings with essential businesses like groceries and pharmacies remained steady.
-Was the impact on housing market similar?
The impact on the housing market was relatively low given that households demand for privately owned homes. This came partially as a result of lower consumption and higher savings during the lockdown. The economic uncertainties also increased the need for more affordable housing in big cities, which in turn provided higher demand for multifamily housing. Furthermore, the work-from-home concept raised demand for single family housing in the suburban areas, where many city workers, especially in the US, decided to move away from highly populated and dense areas.
-Were there any sectors that affected negatively?
-There were obviously sectors that were negatively affected at least in the short term, like hotels or senior housing. The short term negative effect was primarily due to low operational performance at the time of international travel restrictions and lockdowns. The demand for these sectors, however, are expected to remain unchanged in the long term. According to Savills the longer-term fundamentals driving demand remain, with many analysts forecasting that hotel performance will be back to pre-Covid-19 levels by 2022.
Overall, the COVID-19 pandemic changed the magnitude of demand for every real estate type and introduced new megatrends for the asset class, like “work from home” offices or the population movements to the suburban areas, that are still to be observed.
- As far as I know, the investment in real estate highly depend on rents. How was the rent collection affected in the housing market in the US and the rest of the world?
- Sure – rent collection is definitely a very important indicator of the real estate market. COVID-19 further affected the inequality between leaseholders by the means of economic instability and unemployment. The government support was a very vital source for different workers across various wage groups. Thanks to unprecedented stimulus plans introduced by different countries the rent collection did not tumble last year and is expected to recover to the pre-pandemic levels by the end of 2021.
For instance, according to the National Multifamily Housing Council Rent Payment Tracker in the US percentage of rent payments made in the country at the end of April 2021 totaled 95%, which was higher than the April 2020 figure – 94.6%, but still lower than it was in April 2019 – 97.7%. If you look at the figures for the previous months, you will see the gradual improvement trend since the late spring of last year that signals the effective government stimulus package without which it would have been harder for the households to pay the rents.
-That’s multifamily. What about retail?
-Even the retail sector is now showing some improvements. According to the S&P Global Market Intelligence at the end of 2020 ten largest shopping center REITs in the US reported an increase in rent collection, ranging between 89% and 95%, which signaled the gradual recovery in the sector. The single-tenant retail sector performed even better by the end of fourth quarter 2020 with the rent collection ranging between 95.7% and 100%. The office and industrial REITs continued to collect the largest share of their billed rent with rent collection reaching 98-99% on average.
Given the current gradual improvements in the global economy and mass vaccination that is occurring in different regions, I believe that by the time the world lives in the new COVID-free environment, the real estate sector will showcase an even stronger performance given the flexibilities and higher demand outlined before.
- It is now clear that the rent collection is improving. Are there any other opportunities that you see in the sector for potential investors and fund managers?
- Despite the diverse impact, large investors in the real estate market find opportunities for profit in times of market volatility. High liquidity fund managers that have gone through several market cycles already own fairly diversified portfolios and continue to invest in more stable sectors. Thus, the levels of office profitability rates increased during the peak of the crisis of last year as lower interest rates resulted in a positive impact on the market valuations. In addition, higher expected inflation levels due to different governments stimulus packages resulted in higher demand in the real estate investments as one of the key reasons behind investing in the asset class is inflation hedging. Most lease terms are linked to inflation levels that provides coverage against expected increasing price levels.
In general, it is worth noting that, despite all the shocks, real estate remains one of the tools to reduce investment risks, since real estate investments are based on the ownership of real assets. The COVID crisis confirmed this, as we see that after a sharp decline, there was a recovery, although it is happening unevenly. In this regard, experienced players with sufficiently diversified portfolios and large amounts of dry powder have an advantage over newcomers in realizing investment opportunities. Therefore, choosing an experienced, reliable investment manager becomes an even more important factor in a successful real estate investment.
- Thank you Miras for such an interesting conversation! We look forward to learning more about the real estate market and hope to speak with you again in the future!