Positioning investment strategies in a post-Covid world: BlackRock

/ EdgeProp Singapore |

May 28, 2020 7:00 AM SGT

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SINGAPORE (EDGEPROP) - The post-pandemic investment scene will be a profitable window of opportunities for investors with ready capital to deploy, but for the majority with current investment exposure, the “absolute focus” should be on preserving values and incomes, according to a report by Blackrock.

The global investment management firm says the office sector faces mixed trends, as telecommuting is on the rise while desks are spaced out further to reduce density. Demand for CBD trophy locations may also fade further as more back-office functions relocate to city-fringe locations, contributing to a narrowing gap in office rents.

The sudden clampdown on public life has been “exceptionally harsh on hospitality, restaurants, and personal services,” says Blackrock, adding that until a vaccine for the novel coronavirus is found and widely distributed, it is likely that these sectors will see more pain ahead.

The investment manager says it expects travel restrictions and limits on personal mobility to remain impaired for some time. This will have deep implications for real estate demand, particularly in the hospitality and tourism industries.

EDGEPROP SINGAPORE - An empty Clarke Quay taken on April 21. Singapore’s lockdown has been difficult for the retail, hospitality, and tourism industry. (Picture: Albert Chua/The Edge Singapore)

An empty Clarke Quay taken on April 21. Singapore’s lockdown has been difficult for the retail, hospitality, and tourism industry. (Picture: Albert Chua/The Edge Singapore)

Logistics facilities are benefiting from e-commerce, even as demand for traditional warehouse properties diminish with the decline in traditional retail businesses. Retail malls should continue to see a structural decline, given the sector was already suffering from disruption from e-commerce before the pandemic hit. Work-from-home arrangements are also accelerating retail spend away from bricks-and-mortar shops.

In the residential market, multi-generational homes have shown to be resilient assets as the weak job market turns some home buyers into renters, and also drives some back to live with extended family.

As measures to curb the spread of the pandemic shut down parts of the global economy and cut wages for some, residential markets with a high proportion of rental homes will be particularly vulnerable even though governments have stepped up their support through measures such as mandated rental holidays and eviction bans.

While these safety nets are important to protect some distressed tenants, Blackrock notes that they also reduce the certainty of leasing contracts for landlords. “Long term, we may see this higher risk premia feed into income yields,” says Blackrock.

The investment manager says near-zero interest rates is likely to persist for much longer, even as fiscal handouts trickle down to the rest of the economy later this year. All of these may result in some inflationary effects, particularly for real asset prices over the coming years.

Covid-19 impact starting to come through in 1Q2020 <br Covid-19 impact starting to come through in 1Q2020
Table: JLL: REIS FOR MAY

However, compared to the Global Financial Crisis in 2008–2009, financial markets are not exhibiting the same signs of excess leverage, bad lending, or banking sector distress. This means there is a continuing flow of credit from banks which have been ordered to take a more accommodative stance and are less inclined to foreclose on loans for now.

“In a low-growth world, positive drivers of occupancy expansion and rental uplift are going to be harder to find. Asia Pacific markets will likely be a bigger slice of global growth ahead. Finding local demand expansion and deficient supply will be a key source of alpha returns,” says Blackrock.

The investment manager also says that a global recession, dipping consumer demand, rising vacancy, and falling rents will drive an unfolding correction in asset values around the world. Therefore, investors with current exposure should focus on preserving income and asset values. This means working harder to maintain occupancy, collect rents, and keep up maintenance.

“For those with ready capital, (the upcoming recovery phase) points to a significant window of opportunity ahead, as prices fall, distress emerges and competition for assets fade. From prior cycles, we know that each market dislocation has historically been followed by prolonged recoveries in both rents and values, with the size and speed of that rebound determined by local demand-supply fundamentals,” says Blackrock.

Over the next five years, Blackrock also expects the Asia Pacific region to own a greater share of global growth over the next five years, which should support expectations of occupancy, rents, and returns. Diversification gains are also on the table amid a staggered post-Covid recovery phase.

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