HORIZONS | BDO'S GLOBAL VIEWOF MIDMARKET DEAL ACTIVITY 55
REAL ESTATE
MAIN DRIVERS IN POSTCOVID REAL ESTATE INVESTMENT
The appetite for real estate investment remains strong. In a market partially defined by COVID-19, investment capital seeking return, developing technologies, changing cost and interest rates are among trends that define investors’ priorities and strategies. BDO’s real estate teams are in close, daily contact with industry experts and investors. That contact, and our vast network of locally embedded experts spread throughout more than 160 countries, help inform our view on what is happening in the real estate industry. Through present client and market contacts, we recognize the following.
This is influenced by a slower supply of new buildings in some markets due to COVID-19’s impact on construction and supply chains. Interest in real estate is somewhat tempered by uncertainty surrounding mitigation of government stimulus programs to Covid hit entrepreneurs, threat of increasing interest rates and insolvency deferrals. Much capital may see slower deployment as investors look to mitigate some of the uncertainties they face. On the other hand we see growing government stimulus into infrastructure, many countries having a backlog in investments and seeing highly needed maintenance and improvement, not only to (rail)roads, bridges and the like but certainly in power and (renewable) energy networks. This will create new investment opportunities. NAVIGATING INCREASED UNCERTAINTY A strategy of acquiring and (re)developing properties and then selling them to realize a return fits particularly well with the actual market situation and post- COVID-19, where many real estate assets need repurposing and redevelopment. More data-driven investment analysis is needed to create the best foundation for deals during uncertain times.
COVID-19’s effects vary heavily across countries and regions, making insights into local market dynamics increasingly important. Areas such as recalculations of future rental cash flows and updated tenant risk profiles are also top the to-do list of both construction companies and investors. Investors will look to deploy a range of risk mitigation strategies as part of deals, as well as in their investment portfolios. One preferred tactic seems to be changes to portfolio composition and growth in alternative investments. FLEXIBLE AND ALTERNATIVE SPACES SEE GROWTH The future of work looks likely to involve a combination of in-office and work from home (WFH). Office layouts will likely change as the need for office stations for all employees recedes and the need for meeting and collaboration spaces increases. One of the big uncertainties in a post-COVID world when considering real estate investment is the risk of asset obsolescence. Investors back redevelopment of building mass to increase occupancy rates and revenue before potentially selling the properties on for profit. This strategy will likely be particularly active in relation to developing adaptive reuse of unwanted retail, hotel, and office spaces.
HIGH INTEREST DUE TOUNCERTAINTIMES
As we head into a post-COVID ‘new normal,’ real estate is one of the prime targets for many investors across private wealth, institutional investors, private equity and more. Many investors are actively looking to add hard assets to their portfolios during uncertain times. Low interest rate environments support asset values and fuels demand. Prime assets, like multi family, industrial real estate, logistics and data centres, draw much attraction.
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