Since the pandemic started, hundreds of thousands of retail locations have closed; some temporarily, many for good. While this trend has had a visible, almost immediate effect on retailers’ financials and strategies, there is another group of stakeholders who are facing unexpected challenges: Small investors.
Commercial real estate has traditionally been seen as a cash flow-generating investment that often pays more than corporate bonds at a lower risk. While the impacts of COVID-19 have been felt everywhere, commercial real estate is feeling it acutely in terms of demand destruction, highlights Investopedia’s contributor James Chen. He goes on to remind that commercial real estate depends on businesses making their rent and that the pandemic has led to widespread retail slowdown and shutdown, with little demand for empty spaces. There’s a silver lining though: Some sub-sectors of commercial real estate such as warehousing and data centres are better positioned to ride out the pandemic.
UK small real estate investors negatively impacted
As reported by ‘The Guardian’, UK small investors have between them invested billions of pounds in property funds offered by fund management groups such as M&G, Legal & General and Aviva. Others might be invested in property funds via their workplace pension scheme. Typically these property funds are focused on office blocks and retail and industrial premises. For example, the Aviva Investors UK Property Fund’s biggest holdings include the Corn Exchange in Manchester city centre, the Guildhall shopping centre in Exeter and the Grade II-listed Longus House in the heart of Chester.
The funds aimed at small investors are based on the premise of that while it might cost millions of pounds to buy a shopping centre or distribution warehouse, individual investors can gain exposure to these huge developments for a regular investment of as little as 20-30 pounds a month.
Pandemic confirmed the ‘retail apocalypse’ in the U.S.
Analysts at Wells Fargo assess the impact of the pandemic on real estate investors favouring retail properties in the U.S. “Prior to the coronavirus, large mall owners and opportunistic investors were racing to reposition their retail holdings into mixed-use lifestyle centers that included office, apartments, fitness, retail, and entertainment. Now, this repositioning has slowed as owners reevaluate future demand for certain uses and struggle to preserve current cash flow. One positive new use for the often-empty big box anchors of malls is emerging from an unlikely source–e-commerce retailers hoping to expand their last-mile distribution and fulfillment centres,” they point out.
The American bank also recalls that the so-called “retail apocalypse,” led by a shift from brick-and-mortar retail to e-commerce, has been talked about for several years only to be accelerated by the pandemic. An indicator of such trend is the Nareit (National Association of Real Estate Investment Trusts) Equity Real Estate Investment Trust (REIT) index, which has been down around 50 percent in the first ten months of 2020.
Data centres, warehouses and e-commerce pop-ups as the way forward
Prior to the coronavirus, large mall owners and opportunistic investors were racing to reposition their retail holdings into mixed-use lifestyle centers that included office, apartments, fitness, retail, and entertainment. “Now, this repositioning has slowed as owners reevaluate future demand for certain uses and struggle to preserve current cash flow,” they note. As an example, they refer to the iconic Mall of America and the challenges it has been facing with its broad mix of retail, food, entertainment, hospitality, and office space. As of mid-summer 2020, its owner was three months behind on its 1.4 billion dollars loan after a revenue drop of 85 percent since it was forced to close due to the coronavirus.
One positive new use for the often-empty big box anchors of malls is emerging from an unlikely source–e-commerce retailers hoping to expand their last-mile distribution and fulfillment centers. “Despite the uncertain outlook for the brick and mortar retail industry, we do recognize that well-located retail properties may have healthy demand, even if it requires transformation of a portion of the tenant base from traditional retailers to other services, amenities, and experiences that serve the community,” concludes the analysis team at Wells Fargo.
Image: SEARS retail location for sale, Texas, U.S. Credits: The Loopnet