2020 Top 40 Money Managers Report: Hold your ground
But with the coronavirus pandemic throwing assets into turmoil, this otherwise great diversifier is suffering, and the crisis is proving different than any other financial collapse that institutional investors have previously lived through.
Shelter in place
In mid-March, Ivanhoé Cambridge Inc., the real estate investment arm of the Caisse de dépôt et placement du Québec, began to temporarily close its shopping centres across the country. In late April, its retail outlets in Alberta, Manitoba, Ontario and Quebec remained shuttered, some with more optimistic timelines for reopening than others.
The uncertainty around the coronavirus pandemic means the global real estate company can’t predict when things will be up and running again. For its Quebec properties, the firm said it will be deferring retail tenants’ rents until an undetermined future date.
“We are implementing exceptional measures in order to respond to an exceptional situation,” said Nathalie Palladitcheff, president and chief executive officer of Ivanhoé Cambridge, in a March press release. “Each of us must do our part to support the well-being of our community and Ivanhoé Cambridge is united in solidarity with the difficult circumstances faced by many businesses.”
As of April — the first month that rent payments came due after North America began to experience the full brunt of enforced social distancing — retail tenants had already expressed concerns about their ability to pay rent, says Will Robson, executive director and global head of real estate solutions research at MSCI Inc. Like Ivanhoé Cambridge, some major landlords had already proactively arranged rent holidays or other mitigation tactics.
“The virus has led to a very immediate, very quick cessation of lots of economic activity, and it’s hitting the current cash flows of buildings very quickly,” he says.
Non-essential retail, bars, restaurants and other experiential spaces were hit the hardest and fastest, but virtually every physical retailer is seeing a shift in customer behaviour. For example, gas stations are seeing far less traffic because fewer people are getting out and about. Grocery stores are one main exception — they’re seeing far more activity than usual, which will likely remain the case.
“A lot of people have attributed it to panic buying and there is a lot of government messaging going on to try to calm that kind of activity,” says Robson. “If you think of the amount of food that would normally be consumed through cafés and restaurants when people are out or at work, some of it isn’t panic buying, it’s a different route to market for that food.”
Undoubtedly, the virus will weed out many retail tenants, he adds. “For a lot of these businesses, their financial structures just didn’t give them the breathing space to reconfigure themselves. So with leverage, in general, that kind of risk comes home to roost in a crisis.”
However, institutional investors with retail real estate in their portfolios should be on relatively solid footing, says Marcus Turner, senior director of investments at Willis Towers Watson. Previous concerns about brick-and-mortar’s resilience in the face of competition from online commerce have been largely assuaged, as suffering, lower-end locations, such as strip malls, have wound their way out of many real estate funds.
For institutional investors, he considers high-end, destination centres with strong anchor tenants interesting. And while foot traffic has ground to zero for these shopping malls during the crisis, they were performing well before it hit.
“The retail environment is not dead,” says Turner. “There was a conscious decision by real estate managers to scale back on their retail exposure because of the advent of online retail, but I think that’s been overplayed.”
Phoning it in
However, the swift downturn in global economic health could also prove problematic for long-term property valuations across the board, with the pandemic hitting harder than any previous crisis, says Robson. And, when gauging valuations, valuators will have to look at a broader range of factors because the number of transactions taking place has dropped dramatically.
In addition, as the business world reacts to its new constraints, the lessons learned may put additional pressure on real estate valuations, he says. For example, the trends that had been playing out in the area of office space may reverse completely.
Prior to the outbreak, businesses had been examining the concept of shared work spaces, says Robson. “Obviously, that model — from an occupational point of view — really suffers with COVID-19, because the whole idea is having people come together and work in a co-workspace. So there will be short-term pressures there.”
Indeed, with the pandemic precipitating a massive, forced, global working-from-home experiment, it’s actively challenging the entire concept of a dedicated office space. “For years, you had a lot of talk about flexible working and you had employers saying, ‘We support flexible working,’ but there’s the policy versus the reality for a lot of companies,” he says.
“For many, there is very much a face-time culture, where just being present is very important. So through this crisis, all companies that can have anyone work from home have had to invest very quickly and heavily into the technology to make sure people are as productive as they can be through this crisis. Culturally, they’ve had to tell all their staff that this does work, there’s no reason they need to be less productive that they were before.
“Coming out of this, more people will be used to working from home. They know that it works from a technology perspective, and you could see that aspect of work culture being a bigger, more enduring feature of the employment market going forward. And if that’s right, that will feed into corporate occupation strategies and that might have more of a permanent effect on how much office space they need.”
Beyond offices, companies will also be examining whether their overall real estate needs fit with the new normal caused by the coronavirus. For online retail, and the related subsector of logistics and distribution, businesses are seeing an acceleration in new users, says Turner. But it remains to be seen whether those diving into the world of online shopping for the first time will stick with it once social distancing is over.
“In just a few weeks, there has been a tremendous uptick in online retail. Does that continue? I don’t know that it would wipe out the foot traffic, because people are dying to get back into the malls.”
Hotels that cater to business travellers may also see a cultural shift to their detriment, he says. Markets like Europe where professionals frequently travel to another city for a day of meetings could see a lag in hotel demand as people become more experienced using the technology required for remote work.
“Maybe there’s a cultural shift in the view of how necessary that kind of travel is and that could lead to differences in the need for network or satellite offices. If companies have offices dotted around certain regions, do they need that anymore? How much of the hotel industry is driven by that kind of business travel?”
Finding the through line
Before the coronavirus crisis wiped the vast majority of other considerations from the world’s collective consciousness, investment managers were watching plenty of trends around the world to assess the attractiveness of new real estate allocations.
Certain global markets for multi-unit residential real estate properties were flying under the radar, says Colin Lynch, head of global real estate investments at TD Asset Management. While Japan’s population is on the decline, Tokyo remains a growing market, he adds. “That’s being motivated by inward migration within Japan from smaller centres to Tokyo.”
Also, family sizes are shrinking, a theme observed the world over, but especially in Tokyo. As a result, the demand for smaller homes is increasing as more family units in the city are made up of just one or two people. “Though there has been supply, the demand is outstripping it,” says Lynch.
Multi-unit rental residential is also ramping up in Australia, a country where built-for-sale condominiums have been the norm for multi-unit buildings, he says. Over the next two to five years, aided by the country’s robust population growth, the subsector should continue to grow.
In Europe, institutional investors eyeing real estate have been treading lightly around the U.K., especially London, as the details around Brexit dragged on. “London, in the broader U.K., is like an airport that’s been experiencing the fog of Brexit and investors are like airplanes circling the airport, waiting for the fog to clear,” says Lynch. “We’ve seen the beginning of that fog clearing and we think, in the next year or so, we’ll see international allocators moving to the U.K. and bring back allocations to what we might call equal weight.”
Of course, any assumptions made at the start of the year have been put on hold. The question remains whether the economic factors underpinning these favourable trends will still be there to push them forward once the world’s market-making activities start to return to normal levels, says Turner.
Glimmer of hope
With Asia beginning to make cautious inroads in getting back to business as usual, it could provide insight for Canadian pension plans watching to see how real estate valuations come through the crisis, says Lewis Powell, a consultant at Proteus Performance Management Inc.
“The expectation there is, as things are already starting to improve — or seemingly so, from what we’re reading — it should bounce back first. You’ll see a decline, like with [severe acute respiratory syndrome], especially in Hong Kong, [where] there was more of a hit on property values as growth slowed down.”
As the year’s quarters slowly roll through, institutional investors will eagerly await the assessments of the damage, he says. But for those who are able to hold firm on their long-term convictions, there will be assets worth considering once the market begins to unseize.
“Short-term pain provides long-term opportunity, and that should be taken advantage of. The long-term investor who can see past the noise can definitely see this as an opportunity to get in on some discounted asset values.”
Download a PDF of the 2020 Top 40 Money Managers Report.