COVID-19 accelerates REIT shift

Office real estate is undergoing a fundamental shift as COVID-19 has accelerated several global real estate trends, according to First Sentier Investors (FSI). 

Stephen Hayes, FSI head of property securities, said COVID-19 had accelerated existing trends such as the continued growth and adoption of e-commerce, increased data consumption and falling home ownership. 

“However, new trends have also emerged, especially decentralisation of work,” Hayes said. 

“Since the pandemic proved the viability of remote working, we are seeing a shift from dense urban to more city-fringe and suburban locations. It’s part of a new emerging paradigm of living, working and playing locally. 

“In line with this, we believe the office sector will experience a bifurcation between heavily disrupted sky rise office towers, in favour of modern “A” grade city fringe and suburban office buildings.” 

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Hayes said serviced-based businesses were well-suited to the adoption of remote working practices. 

“This brings into the question the need for high-rise office space which tends to be expensive, inflexible, congested and inefficient,” Hayes said. 

“By contrast, high-quality, low-rise suburban office buildings often have larger and more flexible floor plates and can offer greater amenity and more break-out space to facilitate collaboration. 

“In many instances the difference in rent compared to high-rise CBD offices is as high as 50%.” 

As a result, the firm believed traditional CBD buildings would be heavily disrupted, and experience higher natural levels of vacancy and falling market rents and valuations, with low-rise city fringe offices seeing increased demand. 

Hayes said that until now, the split between city-centre and city-fringe tenants had been driven by industry sectors. 

“Traditional professional services such as finance, insurance, accounting and legal, have been using “old world” work practices,” Hayes said. 

“Whereas the burgeoning technology, media and IT sectors have been defining the ‘new life’ trends of a more decentralised workplace.  

“However, we believe there will be greater convergence between the new and old sectors going forward.” 

Hayes said cashflows for real estate investment trusts (REITs) had remained stable over the pandemic, and the long-term outlook for the sector is positive. 

“Rent collections have all remained well above +90% levels this year for logistical centres, office buildings, apartments and detached housing, data centres, self-storage centres and health care assets such as hospitals and medical office buildings.  

“The notable exception is shopping malls, which have been materially impacted. 

“In the main, real estate is set to be a material beneficiary from the expected reallocation of capital across global economies and this will create significant opportunities that will likely cross decades.” 

Another strong thematic identified was residential-for-rent, which includes apartments and detached housing as well as manufactured housing. 

Residential-for-rent was another strong thematic identified by the firm as the fall in home ownership was a long-term trend. 

“Affordability is one driver, but there are also cultural changes; Younger generations don’t always value home ownership like previous generations, and are attracted to purpose-built apartments with high amenity,” Hayes said. 

“The affordability and offering can be very compelling versus home ownership.”