In recent years they have become a prized area for large traders seeking to diversify investment portfolios.
Alternative assets, i.e. retirement homes, other healthcare facilities or flexible offices, remain the focus of investment strategies.
While the impact of the pandemic has left projects linked to alternative assets such as retirement homes, other healthcare facilities or flexible offices in the air, they remain in the spotlight of investment strategies. Will the good prospects for the alternative asset market continue in the post-pandemic context?
The future of alternative assets
No one now doubts the sharp contraction that the pandemic will cause in the economy. Although the forecasts provided by the various official bodies and external analysts vary, they all agree on a sharp fall this year followed by two years of sustained recovery.
This, of course, will have an impact on the real estate sector. With unemployment forecasts close to 20%, a foreseeable loss of purchasing power by society, and an increase in both health and economic uncertainty; it seems very difficult for our sector to come even close to the forecasts it had at the beginning of 2020, especially in the sectors that have suffered the most from the impact of the restrictions.
On the other hand, we are talking about a tremendously heterogeneous sector, so its impact will be very different depending on the typology and geographical location.
It is also important to note that the circumstances we have been through in recent months have brought about changes in society, which in turn are reflected in the real estate sector.
During the confinement we have seen developers and real estate companies upgrading to offer online visits, as well as allowing contracts to be signed electronically.
The logistics sector has also experienced an upturn in its activity, which has led it to consider new solutions to increase its permeability, such as the possibility of establishing city-hubs to facilitate last-mile delivery.
These are just a few examples of how the sector has adapted to the current scenario, which will allow it to emerge stronger once normality is restored.
Is this crisis comparable to the 2007 crisis?
No, they are not comparable. In 2007 we experienced a financial crisis, which directly affected a real estate sector in the midst of a bubble.
The current situation is external, and has nothing to do with the internal management of our economy, so the global response has been the same, a fiscal impulse. It should also be noted that, within the framework of the European Union, this impulse has been carried out independently of the starting point of each country in terms of deficit and public debt.
Although it is clear that the situation is going to affect the real estate sector, unlike in the previous crisis, we are in a situation that will allow our sector to be the engine of economic recovery, for which it will have to implement the necessary measures to reactivate the economic flow and allow the creation of new jobs.
Investment data
The year 2019 marked a record year for direct investment in real estate assets in Spain, with a volume exceeding €12 billion, increasing the previous year's figure by 5%.
More than a third of the total investment went to the office sector, as it became the most profitable asset type to invest in Spain during 2019, surpassing residential and retail. It was followed by the residential sector, with an investment volume of around €2,000 million; and retail, with an aggregate figure of €1,965 million, a decrease of 54% compared to 2018.
Within the retail aggregate, investment in shopping centres was more than EUR 900 million. The logistics market recorded an investment of EUR 1,850 million, with a prime return of around 5%. Lastly, investment in alternative assets.
In alternative assets, investment in student residences reached 900 million euros, including the purchase of real estate and land for their development, while the volume invested in residences for the elderly was around 700 million euros.
The pandemic had little impact on investment in the Spanish real estate sector during the first quarter, as the restrictions only affected the last two weeks of March. The start of the year was particularly good, with a volume of investment exceeding €3 billion, and increasing by 25% that recorded during the first quarter of 2019.
The residential sector reached €500 million in the first quarter, exceeding the investment volume of the same period in 2019 by 30%. The tertiary sector exceeded €850 million in investment, followed by retail with €800 million, double the volume of investment recorded in the first quarter of 2019.
For its part, the logistics market reached 400 million euros. The hotel sector, which has been hard hit at present, also stands out, with an investment volume of more than 300 million euros.
Impact of COVID on asset valuation
In making our valuations, in an unusual scenario such as that generated by the pandemic, three issues were taken into account when issuing securities: choosing the best method for valuation based on the market situation in each area, increasing valuation prudence by taking into account macroeconomic indicators and forecasts, and relying on our internal knowledge of the evolution of micro-markets.
We have considered corrections in value depending on the type of asset, derived from the evolution of each sector and the areas in which they are located. In this regard, we have observed that the most affected sectors have been retail and hospitality, followed by offices and, to a lesser extent, logistics and residential.
The value of alternative assets has historically been less influenced by economic cycles. Socio-economic and demographic indicators support investor interest, establishing these types of assets as safe products, as long as they are linked to long-term contracts.
We believe it likely that, as macroeconomic projections predict, real estate values will evolve in parallel with the rest of the economy, with a recovery becoming apparent over the next two years.
Risks and effects on financing processes
For the time being, and in contrast to the previous crisis, funding does not seem to be a problem (apart from being more complex to process) both because of the origin of the capital of some funds and because of the existing liquidity in the banking system.
However, this situation can change quickly if the European solution is asymmetric, something that, based on the latest decisions taken by the Eurogroup, does not seem likely.
Logically, bank financing will be more difficult for less solvent clients and on poorer quality assets, and the scrutiny of transactions and the demand for collateral will intensify. Therefore, the financing factor could also lead to a reduction in the volume of investment.
Real estate solutions adapted to new trends
The health crisis caused by the pandemic has generated a number of new trends in people's behaviour. We may find changes in the current paradigm, stemming from the confinement we have been through and the possibility of teleworking.
These two circumstances may generate new preferences in demand, increasing the interest in larger homes, with a terrace or garden being more highly valued.
In addition, the lack of a daily commute could lead to a shift in demand to peripheral locations rather than the current preponderance of city centres.
Over the last 10 years, we have already observed an increase in the supply of rental housing, which has risen from 20 to 24% of the total supply available in our country.
With demand mainly concentrated in the cities, the great growth potential for rental housing in Spain is evident.
In this area, new proposals such as coliving or senior housing may find market opportunities. At first sight, social distancing seems to be an obstacle in the approach of these shared models, as they are buildings characterised by their value proposition based on the use of common spaces.
But the proposal that these models offer goes beyond that, it also includes the services and added value provided by the operator. The systematisation of teleworking by most companies due to the state of alarm can be an advantage in this type of proposal, as they are usually linked to coworking spaces, or have spaces that facilitate remote work, while allowing a differentiation between the workspace and the private part of the accommodation.
We are also seeing how, throughout the de-escalation process, most public venues and events are resuming their operations, albeit with capacity limitations in the early stages, and will reach levels close to those prior to the outbreak of the pandemic once the final phase of the process has been reached.
It is to be expected that all the common areas included in the coliving and cohousing proposals will be adjusted to these parameters once the territories in which they are located reach the new normality.
Proof that these models continue to arouse great interest is that in recent months we have observed how part of the supply that had been destined for holiday rentals in recent years has been transformed to offer coliving possibilities, especially in cities such as Barcelona.