As we endure the ongoing COVID-19 Health crisis, BNP Paribas Real Estate Ireland Managing Director and Head of Capital Markets Kenneth Rouse gives us his observations and answers some of the more pertinent questions often put to him.
What will happen to rental values as a result of the pandemic?
Office take up in Dublin is experiencing a sharp decline vis a vis previous years in the recent past due to the lockdown from March to June which many office based companies notably big US Tech firms continue to self-impose well into 2021. This is evidenced by a tapering off of take up by 32% for the year to date versus same period in 2019. Amidst the incertitude that lockdown and restrictions bring there is a further malaise amongst corporates who are putting occupancy decisions “on the long finger”. This indecision and inactivity in demand is obviously not good for rental values however as Dublin CBD is under supplied the market can withstand a temporary lack of demand. We are forecasting that the pandemic will cause a modest decline of 3-5% in office headline rents and we continue to believe that CBD will remain the most sought after location. The next phase of the property cycle will trigger a resurgence of a better restructuration of rental value. Rents have not been representative of the buildings’ quality or location for several years with a tendency purely to converge. Going forward the value of office assets should be broken down further not just to reflect location but also to account for the building’s workspace functionality.
So how will this impact investment values and volumes?
Unsurprisingly the investment market has been experiencing instability due primarily to practicalities surrounding inspections and carrying out technical due diligence on account of travel restrictions. This has translated into a 41% decline in turnover YoY, albeit it is worth noting that 2019 was the strongest year on record with 18 mega-deals completed. We are forecasting total volumes to be in the region of €2.2-2.5 billion for 2020 despite the pandemic, which is broadly in line with the previous 10-year average. Volumes will still remain 7 times higher than the average of just €294 million annually transacted during the Global Financial Crisis. There have been question marks on capital values particularly on suburban assets but generally speaking where there has been a willing buyer and willing seller middle ground was found and deals progressed. Regardless, the returns on real estate are still very attractive when compared to other asset classes, which is unprecedented in the wake of an economic downturn. Thereby, returns and capital values should not oscillate wildly in comparison with previous crises.
What fears, expectations and challenges have your investor clients shared with you in light of this new situation?
The greatest fear is simply, the uncertainty! We seem to be entering a second wave of the virus, will there be a third or fourth wave across Europe? When will there be a vaccine? Will it be effective? How much more of a battering can economic KPIs take? Will the office environment or retail experience ever be the same again? What is the fair price for an investment property? These are all legitimate questions we talk through with our clients on a daily basis but like them, we’re simply unable to give definitive answers, offering instead the best guidance and advice based on our up-to-date research and real time data. However, investors generally expect commercial real estate in Ireland to bounce back quite strongly with a robust outlook for the economic fundamentals in the medium to long term. The market has matured, strong relative value, in comparison to other European cities persists and the diversity of occupiers remains compelling for pan-European investors.
What investment requirements do you see in the investment market currently?
Investors have more or less the same requirements as before. They are pragmatic and view COVID as a moment in time that will pass despite how frustrating it may currently feel. Logistics certainly is the ‘Asset du Jour’ because the sector is booming due to the extra boost the pandemic has given to the already rising e-commerce sector. PRS assets in Dublin continue to be en vogue. Demand in office investment remains unbroken particularly for the primest locations. The retail market is divided as it was pre Covid. Right now, shopping centres are struggling, while local neighbourhood centres and retail parks have a high demand as they are viewed upon as resilient. Investments in specialist assets like nursing homes and hotels are more restrained and viewed upon case by case.
What has been your own experience of working from home? Does WFH have long term consequences?
Honestly…..hated it! I’m one of those who need clear demarcation between living space and working space.
Obviously I got on with it and compliments to our staff in BNPPRE, everyone worked diligently and applied themselves to the technology available. However personally I found it frustrating, at times inefficient and I felt the lack of face time and body language curtailed creativity and caused misunderstandings! I feel the great WFH experiment that happened by accident will have long term consequences but not as clear cut as some commentators are calling. We conducted an extensive client survey on WFH last June and found that while 90% of respondents were happy to work from home during the pandemic, more than 50% said they would not like to continue to do so full time in the future. On balance, it seems that people work better as a team, and bringing the team together supports productive work engagement. Whether the team is more dispersed in a new office space, or just occupies the same shared space but less frequently, are among the questions employers now need to answer.
What are the main questions being asked of you by your occupier clients?
The main concern for occupiers is the question of future space requirements. Will more space be needed if social distancing has to be maintained after the crisis or if pandemics are to become more commonplace? Or indeed is less space required, if more WFH has to be offered? Discussions on getting this balance correct are been held in boardrooms across the globe and not just Ireland right now. With the majority of the workforce still working from home in some capacity, the question both landlords and occupiers are asking is: When will cities formally reopen allowing the workforce to return to some semblance of normality to allow the economy to operate to its optimum?
Over a year ago the co working environment was the next big thing in real estate – has this changed and what ramifications are there for the serviced office business model?
The popularity of co-working is now a widespread phenomenon in Europe. Numerous operators of all sizes have entered the Dublin market aggressively in 2018 and 2019. Even though the pace of take up by co-working brands seemed to be slightly fading last year there was still 8,287 m2 of take up representing 3% of the overall market. It’s probably still too early to assess the actual impact of the health crisis on the co-working market. However, the flexibility made possible by this model could be the guarantee of its sustainability. Companies that will have to reduce their costs could use co-working spaces as a way to lease space without being tied into specific time frames. The crisis has undoubtedly led to the postponement of many office schemes in Europe. Once again, co-working spaces could be the solution for companies waiting for the delivery of their new building. Lastly, the return to the office is a slow and gradual one. Not all employees will be able to be in the office at the same time in order to respect social distancing measures. Office occupiers could therefore use co-working centres as a way of accommodating some of their employees in the short term.
Finally, retail a busted flush or a treasure trove of opportunity?
Firstly it is important not to tar all retail with the same brush. Some facets of retail, like fashion & footwear are undergoing a pronounced structural shift and some retailers in this industry are having a difficult time adapting to the real threat of ecommerce while others are fighting back through an omni channel approach. What we have learnt through this pandemic is that certain retail assets like supermarkets and big box retail parks selling homewares, gardenware, fitness and toys are actually quite defensive with stable income streams and are complimenting the logistics sector very well with minimal (if any) supply chain disruption. Also we are seeing a revival of the neighbourhood centre and provincial towns are thriving again with a bumper summer of staycations and increased footfall. Fighting sentiment is difficult but well located retail will remain just that. There will unquestionably be repricing as rents will soften and yields will widen as we enter a new cycle for the sector. On a selective basis I would definitely be a buyer with the old adage in mind “location, location, location”!