The Final Leg of Reopening Presents Opportunities Across Real Estate

In the spring of 2021, a mood of optimism emanated globally amid expectations the world was on track to normalcy. Vaccinations began rolling out, mobility restrictions eased, and people began to gather in groups again. For listed real estate securities, the result was a rally among the property types most negatively impacted by social distancing measures—hotels, office, retail and urban apartments.

But the reopening momentum took another step back as the more infectious Delta COVID-19 variant spread throughout the summer. While this created headwinds for mobility improvements, sentiment and stock performance of pandemic-sensitive real estate sectors were less impacted than in prior COVID case surges. While the anticipated “return to office” after the summer break was pushed back by many larger companies, schools reopened and most governments initiated only modest restrictions on their populations.

A Path Forward

To be clear, we do not believe COVID-19 is on the verge of going away altogether. We expect the most likely outcome is a scenario in which COVID-19 becomes an endemic disease for the foreseeable future, one that we learn to manage and live with. And while a seasonal uptick in case count during the winter months in the northern hemisphere is likely, we expect the magnitude of severe cases to be significantly less than in prior waves, given higher levels of vaccinations. Various studies suggest that hospitalizations or death from COVID are approximately 10 times more likely for an unvaccinated person than a vaccinated person. In addition, we are on the cusp of having two treatments to significantly reduce hospitalizations and fatalities from COVID.¹

As the Delta wave subsides in many countries around the globe, vaccination levels in the developed world are reaching new highs due in part to growing vaccine mandates and widening of vaccine availability for younger people. We are also finally witnessing a profound change in the thinking by governments, as they are shifting from a containment strategy to planning for how to “live with COVID-19.” We don’t expect any broad-based lockdowns in most markets, even under rising COVID case scenarios. This has already been proven out during the Delta surge in the third quarter of 2021.

While the timing of this reopening varies materially across various geographies, most countries are moving on similar reopening trajectories. The U.K. and the U.S. have been leading the way, with other parts of Europe and Asia expected to follow in the coming months. China is a notable exception in that it continues to hold onto its initial pandemic strategy of trying to maintain zero COVID through aggressive restrictions, tracking and lockdowns.

As the final leg of the reopening unfolds, we think real estate overall is well positioned for a multi-year expansion cycle with those sectors impacted negatively by the pandemic offering the most operational and stock return upside in the near term.

Some Examples of the Opportunities Ahead

U.K. Experiential Real Estate

One of the by-products of the pandemic has been an increased focus on innovation and the acceleration of new business practices. The concept of “innovation” tends to spur thoughts of science and technology, but real estate companies have produced creative solutions to position themselves to emerge stronger in a “post-pandemic” world.

During a recent on-site visit with the management team of Capital & Counties Properties PLC, or “Capco”—a U.K.-based retail holding, our team observed a creative approach to re-positioning assets for the long term. As the country emerged from its initial lockdown in late 2020, large outdoor spaces were converted to accommodate al fresco dining and facilitate a safer environment.

With moderate capital investment, the company worked with local authorities to permanently “pedestrianize” two more streets and provide nearly 1,000 additional outdoor dining seats, with heating and lighting to accommodate year-round dining.² The company has continued to improve the tenant lineup throughout the pandemic and the estate features a strong lineup of tenants to welcome back customers. While international tourism has not meaningfully returned and Central London office use is still recovering, we expect the eventual footfall, retail sales and rent potential to exceed pre-COVID levels.

The photo above was taken on the day our team toured the site with management. The crowds and footfall suggest the only thing out of the ordinary is the bright blue skies above London in October.

Japan

Following a summer spike of COVID cases that coincided with the Olympics, the case counts have declined dramatically, which is likely attributable to both relatively high levels of restrictions and Japan’s success on vaccinations. The country’s vaccination rate has now surpassed that of many other developed markets, and it stood at 73% at the end of October 2021. And yet the most recent state of emergency in Tokyo was just removed at the beginning of the month. The government is aiming to have more than 80% of its population vaccinated by the end of 2021. In addition, the government has published guidelines on ways to “live with COVID.” We do expect the popular “Go to Travel” campaign from 2020 to resume in the coming weeks. The program provides substantial government subsidies for personal domestic leisure travel, aimed at jump-starting the tourism industry.

Separately, the Japanese consumer appears well positioned to drive economic growth as the country emerges from nearly two years of on-and-off restrictions. Household balance sheets suggest consumers are sitting on meaningful excess savings (as shown in the graphic below). Also, employment and compensation are both expected to rise as the country reopens further. We believe this will be most beneficial for Japanese hotel REITs.

Health Care – Senior Housing
Despite the summer surge in COVID-19 cases related to the Delta variant, seniors housing occupancy continued to improve. Higher occupancy rates were driven by resiliency in demand and an improvement in clinical conditions.

A better clinical environment has been driven by higher vaccination rates among seniors, as well as safety protocols enacted by operators. And in many cases employers mandated workers to be vaccinated. As a result, COVID cases have remained low at senior living communities, even as cases spike across the broader population.

The outlook on seniors housing remains favorable, as operators have indicated that lead generations—a leading indicator of move-ins—continue to be above pre-COVID levels.
Long-term demographics are very favorable, and the supply picture has improved from prior years. We believe this may lead to significant cash flow growth over the next two to three years as occupancy levels recover, as we expect rental rate growth above inflation.

Conclusion

While the real estate recovery from the impact of the COVID pandemic has been marred by many alternating starts and setbacks, we believe we are entering the final phase. Most government-imparted restrictions are easing, global mobility is resuming, and social gathering levels are approaching pre-pandemic levels. We think the world is at the beginning of the next fundamental real estate cycle; and recent mobility trends should help jump-start what we think will be a multiyear expansion. We continue to view the current environment as a highly attractive entry point into the listed real estate asset class.

¹ https://www.cnn.com/2021/11/05/health/pfizer-covid-antiviral-pill/index.html

² https://www.capitalandcounties.com/news-media/covent-garden-announces-extension-al-fresco-dining-scheme

Read More