Challenges and opportunities for real estate investors

We asked Simon Townsend, Head of Valuation and Consulting in the Dubai CBRE office his thoughts on investment during these uncertain times.

Is real estate still a sound investment during COVID19?

The impact of Covid-19 on the real estate markets, and the shifts and changes to the fundamentals is expected to continue to be seen for a little while longer. The social and economic impacts have been well documented and the real estate markets have not escaped the pressures this caused. Whilst there have been global shifts in many markets, real estate has shown some resilience, and there continues to be activity in the investment markets, albeit maybe the dynamics and nature of the players have changed.

What are the main challenges?

With any challenge comes opportunity, historic trends in terms of revenue and capital growth give some indication of how markets have performed but the impact of covid-19 has reset the base. Before considering any investment in real estate it is important to seek advice around the asset type, market and sub-markets and importantly what return criteria is sought to reflect the investors risk appetite. Obviously, with higher risk, could potentially come higher returns – noting the emphasis on "could". The investment purpose is also important – is it medium / long term wealth preservation, or short-term value-add capital appreciation approach?

What are the opportunities?

Challenges differ sector by sector, but ultimately the return on any investment is driven by the revenue (and duration) that the asset will derive. Therefore key challenges are: the impact on current and projected rentals, the impact of potential costs (whether incentives for tenants / refurbishment costs) and importantly the duration of occupation. Changes to the economic environment have also impacted tenant covenant strength. Many long established companies have seen their own balance sheets heavily impacted, especially in sectors such as retail and aviation, and the risk of these tenants being able or willing to continue at current levels of occupancy maybe questioned.

It is also worth considering what the “new normal” in terms of working practises means for the investment markets. There have been many discussions around changes to corporate occupation to enable more flexible working, changes to e-commerce, flex-living and potential growth in staycation markets all could have positive and negative impact on differing asset classes and impact differ city by city, country by country.

What tools should investors be using to help them make decisions during these challenging times?

The continued lack of transparency in the market, plus the continued market uncertainty, makes the importance of sourcing the right advice more relevant than ever. Whilst there are opportunities in the market, there are also many challenges, and many investors are looking to acquire assets to counter balance potential portfolio changes due to Covid-19. Government policies are also evolving to breathe life into these markets and the real estate sector. Independent advice around changes to investment structures and taxes in these markets is also something that needs careful consideration. Real Estate remains a very real opportunity, and treading carefully with the right advice can ensure that investment decisions will provide, at very least, a facemask against the impact of the virus.

For further information on the UAE real estate market and investment opportunities, contact Simon Townsend.