Covid-19 : Real Estate market assessment
By Virginie Wallut, Director of Real Estate Research and Sustainable Investment at La Française Real Estate Managers
1. As a result of lockdown and Coronavirus, have you witnessed any liquidity issues in the real estate markets or with certain sub-asset classes?
Property markets are decoupling. On the one hand and with regards to the prime office segment, logistics and residential real estate, we have not witnessed any liquidity issues. On the contrary, since the end of lockdown and judging by the first wave of tenders, transaction activity is robust and reflects strong investor sentiment and appetite for this income generating asset class. Low interest rates for even longer should support a strong rebound in investment activity and ensure the liquidity of these segments.
On the other hand, and with regards to the retail sector, hotels, secondary office assets, liquidity can be challenging due to uncertainties surrounding future cash flows. However, we think that less intense competition on these assets could make room for opportunistic plays.
2. How do you assess the situation in the office market? Is remote working having any tangible effects on the market?
Prior to lockdown, central locations were suffering from supply shortages as evidenced by vacancy rates of less than 3% in central business districts such as Paris, Lyon, Berlin, London and Hamburg. Thereafter during lockdown, these markets, given their fundamentals, were in a favorable position to absorb the temporary drop in demand.
The sanitary crisis simply accelerated workplace trends that in fact had emerged in recent years. However, we do not believe in the benefits of remote work on a permanent long-term basis. Some companies see remote working as an opportunity to cut costs. We however believe that any savings could be outweighed by a decrease in productivity and the implications of potential new legislation that could modify the compensation of remote workers.
We believe that companies will have to define flexible work policies that associate physical presence in the company office and remote working. In this case, offices would:
- Be places of hyper communication with vast and multiple collaborative spaces; office space would be modular and flexible;
- Be centrally located and easily accessible from the new living spaces of employees, and
- Be hyper connected so as to provide all employees (present physically or working remotely) equal access to information.
At La Francaise, we have developed a range of solutions that allow companies to gain in flexibility, i.e. space solutions capable of welcoming a varying number of staff.
3. Are there regional positive or negative trends that emerged or gained in momentum due to the Covid-19 lockdown?
The financial viability of tenants should become the primary indicator of risk assessment in commercial real estate leasing.
The Covid-19 lockdown has generated many uncertainties regarding the future rental flows of retail and hotel assets, which make their pricing difficult and requires specific expertise.
In the office sector, some markets are expected to fare better than others due to the diversification of their economies. For example, given its diverse user base, the Grand Paris region appears better positioned than other markets that are dependent on the automobile or aeronautics industries.
4. ESG is playing an increasing role in illiquid asset classes, what about the real estate market?
ESG is everywhere and initiatives to harmonize methodology and make everyone's approach more transparent are multiplying across Europe. In France and for La Française, the SRI label seems a particularly interesting initiative because our investment philosophy is not to exclude assets with the lowest ESG scores, but rather to help these assets manage their transition and ultimately improve their sustainability credentials.
Real estate is a particularly interesting asset class for ESG because, unlike liquid asset classes, the asset owner actually controls the underlying real estate asset and can therefore make the greatest impact.
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Real Estate Managers was approved by the “Autorité des Marchés Financiers” under N GP07000038 on June 26th 2007, approval (i.e. the Carte professionnelle) granted by the Paris Ile-de-France “Chambre du Commerce & de l’Industrie” under CPI N 7501 2016000 006 443 – Transactions on Buildings and Business Assets and Real Estate Management