Post on 18-Jun-2020
Considerations for the real estate industryMarch 2020
Contents
Context 4
Offices 10
Retail 12
Hospitality 16
Industrial & Logistics 20
How could the real estate industry change post Covid-19? 22
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Considerations for the real estate industry
Context
Figure 1. Total coronavirus cases in the UK (Linear Scale)
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Source: Worldometers/Deloitte Real Estate
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Considerations for the real estate industry
Figure 2: Change in 2020 GDP Growth Forecasts
The economic consequences of the coronavirusChange in 2020 GDP Growth Forecasts
Pre-virus Latest Change Pre-virus Latest Change
Advanced 1.2 1.0 -0.2 Emerging 3.9 2.8 -1.1
US 2.0 1.8 -0.2 China 5.0 3.0 -2.0
Euro-zone 0.7 0.5 -0.2 India 5.7 5.3 -0.4
Japan -0.2 -1.0 -0.8 S.Korea 2.5 1.0 -1.5
UK 1.0 0.7 -0.3 Brazil 1.5 1.3 -0.2
Australia 2.0 1.2 -0.8 Mexico 0.5 0.3 -0.2
Sweden 0.8 0.5 -0.3 Russia 1.8 1/5 -0.3
Global 2.9 2.0 -0.9 Turkey 4.3 3.8 -0.5
Sources: Refinitiv, Capital Economics
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Considerations for the real estate industry
Figure 3: UK construction activity PMI index
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20Construction Commercial activity No change
EU Referendum General Election
By 1st March, coronavirus cases had been detected in England, Wales, Northern Ireland and Scotland
UK construction activity PMI index
• UK construction companies signalled a return to business activity growth during February, following a nine-month period of declining workloads
• However, concerns around the coronavirus are expected to weigh on sentiment in the coming months.
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Considerations for the real estate industry
Figure 4: UK commercial property investment volumes (£millions)
Real estate investment market
• The rapid spread of coronavirus is expected to hit global real estate investment in the short-term as travel and face to face meetings are restricted
• The speed of the market rebound will depend on the period of the pandemic and the pace at which functionality returns coupled with investor confidence
• Opportunistic purchasers are expected to seek to take advantage of the period of inevitably reduced liquidity
• Equity fundraising likely to be impacted by reduced investor confidence in cash flow resilience - although debt markets may prove more accessible as policy makers seek to provide support
• Funding issues due to falling values (covenant breaches) and the loss of income (covenant issues) as leading UK property funds have halted trading.
Source: Property Data/Deloitte Real Estate
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*Figures as of 20th March 2020
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Considerations for the real estate industry
9
10
Offices
Office market
Short-term impact: • Businesses unable to operate remotely, with lower IT resilience and reliant on static office models will be most affected by Covid-19
• Demand for short term office space to fall as workers stay away, impacting the co-working market. This will be mitigated by businesses which need to relocate temporarily as a result of the outbreak
• Occupiers to demand Covid-19 clauses in lease agreements.
Long-term impact: • Enforced experience of agile working is likely to accelerate trend towards more flexible and remote working
• Businesses seeking new office accommodation are likely to require less desk-space per head, with office function shifting to a greater proportion of accommodation devoted to collaboration/meeting room space
• Occupiers to build provisions for community hygiene into their leasing agreement
• Greater adoption of proptech solutions such as robotics that can detect, sanitise and clean buildings
• Greater investment in IT resilience to promote alternative remote working arrangements
• Potential requirements for “multi-centre” disaster recovery accommodation as businesses seek to divide teams delivering essential/critical services.
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Considerations for the real estate industry
Retail
Source: Springboard
Wednesday 18th March (YoY) -27.8%
Wednesday 18th March (WoW)
-23.7%
Figure 5. UK footfall % change by day
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UK retail footfall has plummeted by more than a fifth compared with 2019
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Considerations for the real estate industry
Retail
• Increased risk of store closures, in an already challenging UK retail market, impacting landlords’ rents
• March 2020 Barclaycard survey - more than a quarter of shoppers said they were avoiding high streets and other busy places because of virus
• Food deliveries and e-commerce are thriving but will be dependent upon resilient supply chain
• Rise in sales at supermarkets as shoppers are stocking up on essentials such as toilet rolls, hand sanitiser, dried pasta and tinned tomatoes
• Challenges to global supply chains as borders close with potential move to more onshored models on recovery.
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Considerations for the real estate industry
15
Hospitality
Source: STR, Costar Realty Information
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Figure 6. Impact on hospitality in Europe, occupancy % change
Impact on hospitality in Europe
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Considerations for the real estate industry
Hospitality
• A significant reduction in demand, with major conferences and high profile events around the world being cancelled or postponed
• Risks to staff availability may put a further strain on operators’ capacity to provide a service
• The magnitude of the impact will depend on the duration of the outbreak and counteracting measures
• A potential for a rapid rebound in the second half of 2020 as activity returns to normal level but the return to normalcy could be protracted
• We are waiting to see if Covid-19 triggers structural change in the industry.
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Considerations for the real estate industry
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Industrial & Logistics
Industrial & logistics
• Disruption to global supply chains causing supply shortages
• A shift towards re-shoring or near sourcing of manufacturing
• Warehousing firms specialising in providing short-term excess space is likely to see a drop in demand
• Increased use of automation and robots in warehousing
• Power to become a more important location factor than labour
• A surge in online grocery shopping during the outbreak could be more permanent, which will further increase demand for logistics space.
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Considerations for the real estate industry
How could the real estate industry change post Covid-19?
How could the real estate industry change post Covid-19?
• Remote working to become a more permanent feature of our lives
• With high levels of working from home, technology across life and business is likely to be more integrated
• With more online grocery shopping, it will impact how retailers operate, with a higher demand for warehousing space
• With disruption of supply chains, businesses will shift towards re-shoring or near-shoring
• With travel restrictions and reduced air pollution, we are likely to see less demand for travel and more emphasis on sustainability.
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Considerations for the real estate industry
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Authors Contacts
David Brown Partner debrown@deloitte.co.uk