Lessons For Real Estate From A Market Coming Out Of Lockdown
For real estate in the U.S. and UK, Asia is a vision of the future.
Having been hit by the coronavirus first, places like China and Hong Kong were among the first to implement quarantine and stay-at-home measures, sometimes as early as January.
Now, those measures have started to have an impact, with the number of new cases dropping to levels where it is now possible for people to slowly begin to leave their homes and resume their daily lives.
On a Bisnow webinar, Hong Kong-based Collin Lau, founder of private equity firm BEI Capital and former global head of real estate for sovereign wealth fund China Investment Corporation, spoke to JLL UK head of capital markets Alistair Meadows about what a real estate market emerging from lockdown looks and feels like. Some long-term trends have persisted. But, as much as it is a cliché, some things will never be the same for how real estate is used and operated.
Here are the key takeaways. You can find the recording here.
People Want To Feel Safe
Right now in the markets where BEI operates, like Hong Kong and mainland China, it is not enough to have property that people want or even need to go to: People must feel safe going there.
“People are concerned about gathering together in the immediate future,” Lau said. “A restoration of confidence is necessary if people are going to come to your real estate. That means people knowing that is has been properly disinfected and cleaned.” Air quality in buildings will be of huge importance in future.
Now Is The Moment For Health-Focused Proptech To Shine
Lau said that while proptech and wellness in real estate have been topics for years, they now becomes must-haves. He said that he is investing in air conditioning systems that can filter out the smallest particles possible; bed linens, towels and room fittings for hospitality properties that have micro-biological disinfectant in them; and robotic cleaning systems that can ensure the entirety of a property is thoroughly cleaned.
“The days of having one cleaner or maid for a property are over,” he said. “And we are going to have to properly monitor the health metrics of bricks-and-mortar.” He added that real estate investors need to team up with healthcare professionals to create technology to meet those needs.
There Will Still Be Demand For The Best Property
In the U.S. and UK, vast swathes of commercial property lie empty at the moment. But people will come back — just in a different way.
In consumer sectors where people have a choice of where to go, the outperformance of the best properties will be even more pronounced.
“We have a mixed-use scheme that we have just finished refurbishing in Beijing," he said. "And because of the need to have limited numbers of people in a store, and 1m between people who are queuing, we have a queue of 100m down the block for people wanting to come and buy cosmetics and beauty products.”
He added that in retail, the trend for retailers to outperform when they have a very strong integration of online and offline businesses will be even more stark.
Cities Need To Get Flexible On Zoning
The economic impact of the coronavirus is going to be severe, and a lot of tenants in sectors like retail and hospitality are going to go bust. There is not going to be a long line of new tenants to replace them.
As a result, real estate owners are going to have to be creative in terms of adapting properties to different uses, but they will need the support of governments and local authorities to do so.
“I would urge authorities around the world to be flexible with zoning, to allow the change of usage of things like retail,” he said. “That will be needed to make sure we can reimagine our cities so they are fit for purpose for the 21st century.”
Even More Mixed-Use
Lau said that the impact of the virus would accelerate the trend of properties incorporating a mix of uses, for a couple of reasons. First, people would be wary of public transport, and will favour areas where they could live, work and play without the need to get on a busy train or bus.
Secondly, properties with just one type of use are left more exposed to changes in the way we live. He gave the example of a BEI hotel that had converted to incorporate offices, retail, traditional short-stay hotel use and longer-stay aparthotels. As a result, some of the income had been maintained during the lockdown. If it were only a traditional hotel, its revenue would have dropped to zero overnight.
It’s Not Really An Opportunistic Moment
BEI Capital is best known as a value-add and opportunistic investor, but BEI said that unlike in the aftermath of the financial crisis, the current downturn is not going to throw up plentiful opportunities for distressed investment.
“This is not something that is a balance sheet issue for financial organisations and real estate firms, it is a public health issue,” he said. “We are allocating more of our capital into defensive positions.”
For BEI that means providing credit, either through debt or convertible equity, keeping it protected if values do drop significantly.
With all investments in the coming months and years, debt or equity, he gave this piece of advice: “Do your homework and make sure it is a property you don’t mind holding for the long term, and where you have a strategy to add value if you need to.”
Central Banks Can’t Make People Healthy
“I wrote to some friends recently that I think the impact will be worse than SARS [in 2003], but I hoped it wouldn’t be as bad as the GFC. But it could be,” Lau said. “Central banks and governments have acted quickly this time, rather than waiting for a Bear Stearns or a Lehman to go bust, and that will stop the bleeding. But this is a public health crisis, and quantitative easing can’t cure people. We need to solve the health problem first.”
Don’t Look For Cross-Border Capital Any Time Soon
Asian institutional investors have been major players in markets like the U.S. and UK for a decade now, but don’t expect to see much of that for a while.
“To ask an investor to fly to New York or London to do due diligence on a deal is very difficult right now,” Lau said. “It goes back to that question of whether you feel safe. It is a practical issue.”
Take Hope: We’re Still Here
Lau ended on a note of hope. “Humanity still exists,” he said. Tens of thousands of people have lost their lives, but there are still a lot of us here who will still go out, gather, work live and play. In the long-term, those properties that meet the needs of the way our behaviour and demographics are changing will still be highly profitable. This will end.