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How real estate can survive the crisis



It is not the intention of PRO-REALESTATE to report on coronavirus, but a piece of research about the likely effect of the crisis on the real estate industry worldwide, carried out by advisor JLL, is of interest to all of the market.
JLL says that the she short-term impacts of the virus on economic growth, business activity and individual behaviour are undeniable and, while the current consensus is for a rebound in the global economy in the second half of 2020, the exact trajectory is unknowable. JLL therefore suggests a scenario planning approach, rather than betting on any bold predictions, with a focus on preparedness for either a mild to moderate slowdown that is transitory in nature or for a more severe and sustained slowdown.


For corporate occupiers, the advisor says, the health and well-being of employees will be the initial primary corporate concern, followed closely by business continuity plans. Given the rapidly changing situation, businesses need to be nimble and flexible. It advocates a corporate response that focuses on Preparedness, Protection, Monitoring and Communication. And operational resilience will be a longer-term focus for real estate decision-makers as businesses develop the ability to respond quickly should they face another similar event in the future.

Investment

Where capital markets are concerned, investment activity is likely to slow in the first half of 2020 as investors react to uncertainty, with the retail and hospitality sectors being the most affected. A shift to defensive assets is expected – key considerations as major arbiters of risk include income stability, operation criticality and occupation density. JLL points out that real estate investment has fluctuated during previous crises, but the overarching trend over time has been for increased allocations to the sector and it sees no reason for this to change. Real estate continues to offer attractive relative returns in comparison to other asset classes.


Returning to hotels and hospitality, the impact of travel restrictions, event cancellations and individuals’ reticence to travel have been immediately felt in the hospitality sector. In the short term, occupancy rates will fall. And of course locations with a high proportion of international visitors are most exposed, whilst locations accessible to a domestic audience by car or public transport may benefit. There is potential for a fairly rapid rebound if the virus is contained in a reasonably short timeframe.

Retail

With so many retail outlets being forced to close by order of governments, global retailers must prepare to navigate a period of elevated risks to cash flow and increased operational costs arising from this slump in consumer demand and disruption to supply chains. Protecting cash flow remains crucial for all retailers, and particularly for those operators with narrow profit margins. Those hardest hit may seek temporary rent reliefs from landlords. E-commerce comes to the fore in this situation, and JLL says that retailers with robust infrastructure to fulfil online orders could be longer-term beneficiaries, placing a greater emphasis on the shift towards a flexible omni-channel retail model. Ensuring continuity of operations by rethinking supply chains will be key to mitigating the risk of future shocks.

Logistics

Finally, JLL turns to industrial and logistics markets, saying that the disruption to global supply chains is the main effect on the industrial and logistics sector. Reduced activity at major gateway ports and airports is resulting in falling utilisation rates and idle resources. The outbreak is likely to elevate the issue of supply chain resilience and mitigation. This crisis may also accelerate the use of automation and robots in operations and reduce the sector’s reliance on labour. The move to online shopping, especially for groceries, could become more permanent and, in turn, boost demand for logistics space.
Tim Harrup
23-03-2020
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