Real estate investment in a post-Covid world

“Residential properties for rent are where I am chasing a lot of capital given the affordability constraints of buying or renting. Investments in this sector are typically supported by (1) housing formation / demand growth, (2) undersupply due to construction delays, (3) underinvested / undermanaged (current) stocks, and (4) resilient cash flows. “

Paul Nearchou, director of a London-based private equity firm that is a major international real estate investor, sees a number of trends emerging from the pandemic crisis.

Paul Nearchou

Q:What are the key general changes in investing in the post-covid world and how will they perform in the future?

A:The reality is that we have not yet fully seen the impact of Covid on the market. So this question is very difficult to answer. However, we can say that Covid has accelerated the existing trends, with real estate investors increasingly focusing on:

• Customer-Oriented Real Estate: This is known as “hotelizing” real estate to become more service-oriented and customer-oriented. This means more practical, operational management with great attention to the customer experience and less a traditional relationship between landlord and tenant. The view here is that doing so would increase tenant retention and lead to higher rents.
• Innovation: Innovation refers to the need to invest in technology across all asset types to improve efficiency, support property management and future-proof assets.
• Worldly Trends: Focus on long-term growth trends such as the growth of logistics with the rise of e-commerce or healthcare given our aging population.

Q:Residential investments seem to focus on certain types of property?

A: Well-defined residential homes, including single / multi-family homes for rent, sale, and student accommodation, have been gaining increasing attention. This is underpinned by demographic and social urbanization trends.

In the case of rental apartments in particular, I see a lot of capital on the hunt for products given the affordability restrictions when buying and renting out. Investments in this sector are typically supported by (1) housing formation / demand growth, (2) undersupply due to construction delays, (3) underinvested / undermanaged (current) stocks, and (4) resilient cash flows.

Q:Has remote working changed real estate investing?

A:The central question we are currently asking is how does working from home affect key office locations?

On the one hand, I strongly believe in the importance of the workplace in building team cultures and creating environments in which individuals can learn, grow and develop. However, I also see a trend towards flexibility and that a more hybrid working life will be the “new normal”. Overall, we’ve seen that working from home can work!

An interesting trend that I see for offices is the flight into quality of users as they focus on sustainability / furnishings / wellbeing. In other words, employers must provide a reason their employees are in the office (apart from work). I expect investors / investments to follow this trend to both attract users and ensure that assets remain liquid / in demand at the point of sale. This is also in line with the ESG trend / focus you see from institutional investors.

Q:How do you rate real estate after the Covid in the healthcare sector?

A: Definitely a sector that I work on more and I see more and more investors looking into this area.

The nursing home sector is typically more complex given the nursing aspect (and related regulation), with a greater proportion of investors targeting assisted living / retirement concepts. This is underpinned by the aging of the population (around 20 percent of the EU-27 population was 65 years of age and older in 2020) who live longer and have typically built up significant equity in their family homes.

Q:Which trends for hotels?

I believe in long-term trends among leisure consumers, which is why I expect leisure-oriented hotels to make a relatively quick comeback. Conversely, I would argue that business travel (given the fast and fairly seamless adoption of video calling programs) is unlikely to return to pre-determined levels and foresee more challenges for conference-driven assets in the short to medium term.

Following that, I see a good opportunity for value investments that support the combination of pent-up consumer demand and the long-term growth of vacation travel. In the short term, as travel remains relatively difficult and expensive given the persistent restrictions, I would target Staycation platforms.

These are usually hotel groups or leisure companies focused on domestic leisure (see Blackstone’s acquisition of Bourne Leisure, a leader in the UK vacation market with the Haven, Butlin’s and Warner Leisure Hotels brands as an example).