COVID19: Notes from the field

Given the recent volatility in markets, we thought it was worth providing an update on some of the dynamics we are currently seeing as it relates to commercial real estate.

• There is, as yet, limited evidence of widespread movement in yields. However, asset classes with direct exposure to offshore visitors, such as hotels or retail, will likely be subject to structural repricing in the short term.
• The current lockdown is limiting many buyer’s abilities to conduct core property due diligence, halting several deals in the market, with most delayed until a reduction to Alert Level 2.
• Due to inadequate transactional data to benchmark value, it is increasingly difficult to price commercial real estate at present. Valuers are placing caveats on their advice and noting high valuation uncertainty as pressure mounts on net operating cash flows and investment sentiment, two key drivers of commercial real estate value.
• Many commercial real estate investors are adopting a 'wait and see' approach and looking for opportunities from distressed acquisitions or sale and leasebacks, as owner-occupier's look to recapitalise their businesses.
• Recent institutional led capital raises by retailers (Kathmandu raised $207m) demonstrate institutional support for particular areas of the retail sector over the long term. However, retail assets have been coming under increasing pressure over the past few years, and there are headwinds they will continue to face. The risk that the lockdown will accelerate consumer behavior towards purchasing more online vs. in-store, as well as highlighting the importance for retailers to have an online presence in potential future lockdown situations.
• Kiwi Property recently announced it would withhold its 2H20 dividend to investors, reflecting a significant exposure to retail within its portfolio. Sizeable downside revaluations seem to be incorporated into its share price.
• The medium to long-term impact on industrial and logistics buildings is expected to be muted, with low vacancy rates forecast to continue post lockdown, due to continued population growth and e-commerce trends. Occupiers involved in crucial supply chain activity will be highly sought after. In contrast, businesses reliant on offshore demand will be less desirable as NZ's border restrictions are expected to remain in place well beyond a reduction in the Alert levels.
• The ADLS Lease Sixth Edition 2012 allows for a "fair proportion" of rent and outgoings to cease to be payable during an emergency while a tenant is unable to access a property to conduct their business. Most landlords and tenants are taking a proactive approach to agree to a 'fair proportion' of rent relief during the current lockdown. They are taking into account factors such as whether the tenant can partly use the premises, the total impact on the tenant's revenue, and what essential outgoings are payable by the landlord. Landlords are offering anywhere from 30 to 180 days of rent deferral and are typically either looking to amortize those months into the remaining lease term or extend the term of the lease.
• Most insurance policies in the market will have an infectious disease exclusion and therefore, will not be covered for any loss of rents caused by the current Alert Level 4 lockdown.
• Australian logistics landlord Centuria Industrial REIT became the second ASX-listed property trust this week to seek a fresh injection of equity (c.$130m fully underwritten) from institutional investors and existing shareholders to bolster its balance sheet amid the COVID-19 uncertainty. The move will strengthen their balance sheet and provide the opportunity to capitalise on attractive transaction opportunities. The REIT reduced full-year earnings guidance but maintained its full-year distribution.

We will continue to keep you updated on news and developments across the market in the coming weeks. As always, please do not hesitate to contact us if you would like to discuss any of the above in more detail.