Pandemic will force property investors to ‘future proof’ portfolios - report

Ronald Quinlan

The combination of Covid-19 and the continuation of trends already underway in the residential and retail sectors prior to the onset of the pandemic will force many property investors to focus on reconfiguring their holdings this year to protect themselves against future market shocks.

That’s according to commercial real estate advisor CBRE’s Outlook 2021 report.

While traditional core assets such as prime offices will continue to attract buyers, CBRE’s head of research Marie Hunt says investors are expected to target the private rented sector, logistics and pharmaceutical/biomedical properties or “beds, sheds and meds” in increasing numbers to “future proof” their portfolios.

Commenting on the overall prospects for the Irish investment market in 2021, CBRE Ireland’s managing director, Myles Clarke, told those attending the report’s online launch on Tuesday that Covid-19 would see an increase in the level of capital being invested in real estate, and to Irish real estate in particular.

Blackstone set to acquire stakes in two prime Dublin offices

---

Nama to transfer €1bn to Government amid 10th year of profit

---

Dublin 15 industrial and logistics space seeks €7.78 per sq ft

---

Chinese invest in Irish social housing and nursing homes

---

“While real estate on the whole is not immune from market fluctuations, as an asset class it continues to offer relative stability of income and capital appreciation, which is attractive to investors,” he said.

CBRE’s predictions for the Irish market follow on from a relatively-robust performance in 2020. According to its research, more than € 3.6 billion was invested here in the face of the Covid-19 pandemic. Some 48 per cent of the investment spend was accounted for by the residential sector while offices accounted for 36 per cent by comparison.

But while CBRE expects this year to be a busy one both in terms of transactional and investment volumes, it believes much of this activity will take place in the second half, by which time the rollout of Covid-19 vaccines should allow investors to travel freely to inspect buildings and conduct due diligence.

Referring to the prospects for the office sector, CBRE says it expects to see a notable pickup in leasing activity towards the latter end of this year, but with fewer large transactions being signed than in previous years. The report’s authors say this will encourage some landlords to adopt a multi-let strategy in order to reduce vacancy in their buildings and generate income as opposed to holding out to secure a single occupier.

Commenting on the longer term impact of the pandemic on the office sector, the report says there will be increased demand for flexibility, both in terms of the adaptability of office buildings themselves and increased flexibility in the leases agreed between landlords and tenants.

“The occupational needs of companies will change as a result of the outbreak of Covid-19, and CBRE believe that while companies may not necessarily need less office accommodation, the way they use that accommodation will definitely change. This more distributed pattern of work will have implications for workforce management. Occupiers the world over will have to think seriously about the configuration of their office buildings, how efficiently accommodation is being used and how this might change in the future, with an increasing proportion of staff likely to work remotely, either from home or another ‘third place’, at least part of the time.”

Looking at the private rented sector (PRS), CBRE says that “considerable domestic and European institutional capital” is targeting both public and private sector opportunities, adding that the investment case for the Irish residential market had become even more compelling as a result of the sector’s resilience during the pandemic.

The report’s authors say they expect to see more developers apply for planning permission and developing PRS schemes in fringe locations that offer accessibility to good public transport, on the basis that affordability is better, and the renter pool is deeper in these locations.

Turning to the market for industrial and logistics assets, CBRE notes that the sector continued to flourish throughout 2020 with some 343,716sq m of space being taken up. This performance was supported by Covid-19 lockdowns and Brexit-related uncertainty, both of which served to stimulate an increase in e-commerce and data centre activity and necessitated the reconfiguration of supply chains.

This year, CBRE expects to see demand for temperature-controlled warehouse space increasing as food exporters and importers move towards holding increased inventories in-country. It also expects to see increased interest from investors for opportunities to invest in data centres and life sciences facilities, both of which are highly sought-after across Europe at present, and the potential leasing of accommodation by UK retailers to support online-only businesses in Ireland.

Commenting on the outlook for the physical retail sector, CBRE says it expects to see leasing arrangements become more aligned with tenants’ ability to pay and their turnover, and with shorter lease lengths being sought and granted.

On this, the report says: “The significant re-gearing and restructuring that has characterised the retail market over the last 12 months is likely to continue in 2021, meaning we are now firmly in a tenant’s market. A thinner pool of occupiers seeking to secure stores coupled with greater availability and flexibility means that rental values will have to rebase to new levels in order to prove attractive to retailers.”