Perspective in the pandemic
Throughout my career as a real estate lender, I haveexperienced many storms. From the early 90’s recession, with interest rates at nearly 20%, to the 2007 downturn with the banking and liquidity crisis, these were regular cycles and were clear indicators in the market that disruption was coming. They enabled us to prepare and create some level of resilience.The COVID pandemic, however, truly came out of nowhere which makes it unique, so far. This teaches us that whilst we can try to plan for a crisis based on previous experience, it is difficult to tell exactly what will cause the next downturn. In this article, I will discuss how the current crisis has impacted key trends, how best to manage the crisis and finally what opportunities it may present. Whilst the last downturn caused a peak to trough fall of circa 60%, this time there have been winners and losers even within the same sector, with food store yields hardening whilst shopping centre values have fallen by 70% in some cases.
The COVID pandemic has had far-reaching effects across the world that will continue to resonate well into the future. Across the UK, the pandemic has clearly accelerated some key trends that were already underway. We have seen over the last few years an uptick in the popularity of online retail, flexible working, desk sharing, and last-mile logistics. The pandemic has accelerated these further. Investors with large concentrations of assets and income streams either by sector or by tenant have been particularly affected.
“Whilst the last downturn caused a peak to trough fall of circa 60%, this time there have been winners and losers even within the same sector“
Personally, I have had the same realisation as many – working from home constantly is not ideal, particularly with children understandably needing attention. The difficulties in effective team communication notwithstanding, improvements in technology and the loss of the social side of being part of a team have been felt. This will, I believe, lead myself and countless others to seek flexible working arrangements in future with a balance between office and home working and possibly in the short term, a reduction in commuting allowing desk sharing and hence requirement for less office space, particularly affecting large offices.
Further, some long-established names, that were perhaps taken for granted, who were unable to change and adapt key parts of their businesses and had expensive portfolios of stores, such as Debenhams, or operated in markets severely affected by COVID, for example Flybe in the travel industry, have disappeared. This trend for less retail stores generally will continue.
“I would stress the importance of detailed assessment of each loan early on and considering what factors caused by COVID will affect the specific asset”
Managing the crisis
For lenders and brokers looking to manage through the crisis, I would stress the importance of detailed assessment of each loan early on and considering what factors caused by COVID will affect the specific asset. It is important to understand the borrower’s strategy and how it is evolving to protect, as far as possible the cash flow and value and make sure they are in close dialogue with their tenants.
In previous downturns this has worked well and avoided crystallizing a loss at the bottom of the market. Once a receiver is appointed, the property is tarnished and a value reduction of at least 20% can be expected from the pre-appointment value. Above all, I would recommend wherever possible, be patient and work with the borrower if they are engaged and realistic. This usually achieves the best result for all.
As with any crisis, there is a light at the end of the tunnel, and along the way, opportunities. For example, lenders may find niches in the market where risk-reward is balanced. Opportunities for alternative lenders will undoubtedly grow as I expect traditional funders are likely to be slower to return due to their natural conservatism and their regulation.
For investors, residential investment into houses, rather than apartments, I think is a wise move due to the rise in demand to satisfy the current family housing needs. It is also a shift towards European styles of housing ownership driven partly by generational affordability. Investors should also consider the opportunities presented by retail parks with their tenants generally having fared better through the downturn, such as discounters, bulky goods, and DIY, which have over the last few months become more attractive and out of town regional offices, particularly those with good parking as there may be reticence for some to return to public transport. Some sectors will see a steep recovery, for others it will never recover for example secondary high street retail.
Hopefully over the next few months we will see businesses open again, a return to some sort of normal, with confidence returning and transaction volumes increasing.