Article written by Sylvie PROIA, Partner and Co-CEO of Unik Capital Solutions - AGEFI Luxembourg - April 2020
While containment measures and the health crisis are hitting the economy hard, the deep uncertainty linked to this episode is having a severe impact on the financial markets, which are traditionally plagued by doubts. Should we therefore fear an impact on real estate investments?
The health crisis linked to the COVID-19 pandemic, unprecedented in today's economic world, is putting companies' response capacities to the test. Without delay, Unik Capital Solutions, concerned about the health and well-being of all its employees and partners, has implemented its business continuity plan. From now on, all employees are organized as teleworkers, combining security and efficiency. The telephone and video conference links between the members of the management, operational and strategic team, as well as with the various partners, custodian banks, distributors and investor relations are daily.Unik Capital Solutions mobilizes its team to monitor real estate markets, analyze investment segments and places listening to investors' expectations at the heart of its strategy. Over the last few weeks, targeted studies on its preferred markets have focused on this health and economic crisis, the duration of which no one can predict. The analysts are trying to estimate its impact on professional real estate investment and the real estate investment targets favoured by Unik Capital Solutions. In this context, the conclusions reassure and confirm the orientations pursued by the company.
Observing the strong resilience of the real estate industry
During past economic crisis episodes, real estate has historically shown resilience. Real estate investment has a traditionally high risk return, especially nowadays when the return over the risk-free rate is at record levels. Even if the emerging crisis were to last, real estate markets with low vacancy rates would be able to withstand a recessionary wave as long as the markets are sufficiently liquid and rates remain low. The commitments made by the European Central Banks in recent weeks to maintain key rates at zero are in line with this maintenance of liquidity. Finally, rental income is, by its very nature, less vulnerable than income from investments in securities, dividends from equity securities or interest from bonds issued by traditional companies.This being the case, it is obvious that over time, traditional professional real estate and its performance are strongly linked to GDP. Traditional professional real estate investment funds that have relied primarily on office space and commercial premises may fear the medium-term consequences of the current health crisis linked to COVID-19. Indeed, the massive wave of containment on the one hand, and the implementation of business continuity plans based mainly on teleworking on the other, will not be without inducing profound changes in living and organizational habits. Offices are currently experiencing a sharp decline in occupancy due to the fact that employees are confined to their homes.
Massive investments have been made in an emergency to implement secure remote work organizations, thus ensuring business continuity. It is to be feared that, when traffic and working conditions return to normal, companies will be called into question with regard to the organization of work. During these weeks of confinement, teleworking could prove to be both effective from the point of view of productivity and beneficial for the well-being and balance of employees.
Thus, some companies could be tempted to carry out an in-depth review of their organizations. Teleworking could then find an important place in the new work habits that have been implemented. The resulting reduction in space occupation would allow companies to reallocate their resources and reduce the proportion of investments dedicated to office space rental. This could have an impact on the demand for office space in the medium and long term.
With regard to commercial premises, currently deserted by the imposed closures of businesses other than basic necessities, there are fears of the consequences of this period of inactivity for operators. Of course, governments, concerned about the post-crisis future of their economies, are putting in place generous policies to support traders and businesses. Nevertheless, in the case of waves of large-scale business closures, the under-occupation of commercial premises, which has already partially begun as a result of the transfer of consumption to e-commerce, would be greatly intensified. These two trends place the burden of medium-term uncertainty on traditional real estate investment funds focused on offices and commercial premises.
Focus on sector diversification
In this context, experts agree that the real estate investment funds that will do well will be those that have been able to implement both geographic and sectoral diversification in advance of the crisis. This is the approach adopted by one of the investment solutions proposed by Unik Capital Solutions, Cacik Fund*. It is important to bear in mind that sector diversification does not simply mean multiplying the target sectors of activity for real estate investments. The analysis goes further and integrates the identification, among sectors, of those with a cyclical, counter-cyclical or even agnostic (1) profile vis-à-vis the economic climate.Thus, it is above all the point of view of the user of the property, his business, or even the end customer of this user, that must be identified in the search for and analysis of investment opportunities. Of course, it is essential to take into account the major fundamentals of real estate investments. The investments that offer the best resilience are located in prime locations with tenants of proven financial strength, tied to the properties by firm long-term leases. Beyond these fundamentals, sector analysis is, according to the experience of Unik Capital Solutions' experts, one of the essential keys to the success of an investment.
Since the inception of Cacik Fund*, the investment policy has targeted sectors with good growth and return prospects, while offering distinct economic climate correlation profiles. Thus, among the three sectors targeted, the hotel industry is clearly impacted by the crisis. In contrast, e-commerce logistics clearly presents its counter-cyclical profile. Not only has this sector posted sustained double-digit growth over the last ten years, which has been increasing period after period, but since the beginning of the health crisis, it has become the main, almost exclusive mode of consumption for households. Difficulties related to delivery and health safety measures do not call into question the solid performance of e-commerce. For example, major online distribution platforms have seen a 21%(2) increase in transactions in recent weeks. They are simply extending the time it takes to make ordered goods available to customers who are more patient due to the scarcity of consumption patterns. For their part, manufacturers and distributors, having to learn the lessons of the supply difficulties experienced recently, could seriously review the just-in-time inventory management policies in force over the last few decades, thus requiring larger and more robotized XXL warehouses.
Finally, Cacik Fund* is targeting investments in medical residences, particularly for elderly people in a situation of loss of autonomy. In a context where the aging of the population is a proven reality in all Western European countries, where life expectancy is increasing but that of healthy living is stagnating, most countries suffer from a chronic shortage of care facilities for the elderly. The over-65s represent more than 20%(3) of the population in most Western European countries, and this proportion is expected to increase further by 2050. The challenge is to offer accommodation structures adapted to accompany this ageing process.
Agnostic(1) to the economic climate, the income allocated to these accommodation expenses is, in the majority of the countries concerned, covered by social security systems and government aid, which largely supplements the resources of senior citizens. The health crisis highlights the needs of vulnerable people in terms of medical support, but also for all the tasks of daily life, such as food supplies during periods of confinement. Given the very high occupancy rate of these structures in most of the target countries and the ever-increasing demand, these investments clearly present prospects in a climate of economic uncertainty.
Adapt your strategy in an agile way
The correction in the value of the real estate markets that will take place, in all likelihood, will penalize all sectors to a greater or lesser extent. On the other hand, it will spare vehicles that are currently entering their investment period. It could even offer them advantageous investment opportunities, due to acquisition costs that could be revised downwards.Cacik Fund*, initiated in 2019, is in the early stages of its investment period and has many projects under consideration. This strategy offers the investment fund great flexibility, such as the ability to withdraw from investment projects in sectors affected by the health crisis. This is the case of the hotel industry in particular. Only one hotel project remains on the table, while the other projects in the tourism industry are on hold. At the same time, the focus is on the realization of projects for medical residence structures in Europe and XXL warehouses for e-commerce logistics. The flexibility offered by this strategy allows the investment portfolio to be rebalanced according to the economic climate, in an approach not unlike that of equity management.
Finally, in addition to an obvious diversification of investments, the Cacik Fund* strategy aims to select only sectors whose stability has been demonstrated by studies, following an in-depth analysis of consumer behaviour over the entire decade. Analyses carried out in-house are compared with the opinions of MRICS(4) certified real estate experts in order to secure the choice of properties, acquisition prices and valuations. The model offers the flexibility of being able to quickly reorient management and adjust it around the three target sectors through agile decisions by the Investment Committee.
Analyzing profound changes now and in the future
At the end of this global health crisis, the question that will arise will be that of massive changes in the behavior of tomorrow's consumers and businesses. There will undoubtedly be an in-depth questioning of work and consumption patterns. Globalization, which has been partially called into question by the withdrawal of states into themselves during this period, will no longer be so obvious to companies and economic policies.The trends to be observed are multiple at the dawn of this economic renewal, whether they be changes in consumption, work, production and marketing modes. Unik Capital Solutions' teams of analysts are mobilizing and, while consolidating the promising projects currently underway, are already working on identifying tomorrow's promising trends.
Article written by Sylvie PROIA, Partner and Co-CEO of Unik Capital Solutions - AGEFI Luxembourg - April 2020
* CACIK FUND SCA SICAV - FIAR, its sub-fund ("Unik Premium"), is a real estate investment solution proposed by Unik Capital Solutions and managed by an AIFM in Luxembourg. The solution presents an exposure to the hazards of the real estate markets: risk of capital loss and liquidity risk.
1) A sector that is agnostic to the economic climate is not directly impacted by economic hazards.
2) Source: ContentSquare.com study 13/03/2020
3) Source: Eurostat
4) Member of the Royal Institution of Chartered Surveyor