The COVID-19 pandemic has demonstrated the strengths and weaknesses of property assets; with clear winners and losers emerging in the wake of the crisis.
That's according to Principal Real Estate Investors chief executive Todd Everett, who told Financial Standard the pandemic - and the measures taken to contain it - have impacted tenant's use of leased facilities, created cash flow problems, reduced private equity and debt transaction volumes, and limited investors ability to complete proper due diligence on property investments.
However, certain property assets have demonstrated strong resilience and have been unaffected by the crisis, he said, creating three distinct types of opportunities.
"We're starting to view COVID-19 as creating three levels of investment opportunities - COVID Resilient, COVID Assisted, and COVID Disrupted," Everett explained.
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"COVID Resilient" property assets include industrial and multi-family properties; the first of which has greatly benefited from accelerated e-commerce activities and the latter which has seen a high level of rental collections and occupancy in the downturn.
"We feel both property types should be well positioned long-term with supportive demographics and demand profiles," Everett said.
Data centers are an example of "COVID Assisted" opportunities, he said, as they provide the infrastructure needed to keep people virtually connected both personally and professionally during the crisis.
Everett believes both "COVID Assisted" and "COVID Resilient" classifications present the greatest opportunities in the current environment.
Meantime, "COVID Disrupted" opportunities encompass high-volume, high-impact property assets like retail and hotels. These property assets have been impacted the most by the pandemic, Everett said, and have experienced the greatest changes in operations and valuation declines.
"When we have increasing clarity on valuation reductions, there may be future opportunities for discounted investment," Everett said.
"We believe the office property type will see near-term downward pressure; however, we remain constructive on long-term fundamentals for flexible, high-quality assets in dynamic growth markets."
Current challenges in office and retail property investments have driven further interest in diversified property portfolios, he said.
"Niche sectors have developed a great deal of investment interest from clients and have often taken an elevated status in our recommended solutions," he said.
"These include data centers... However, we are also looking further into areas such as life sciences, bio-medical and industrial cold storage."
Despite the heavy sell off in REITs in March and several macro forces still at play, Everett believes there are still opportunities for the sophisticated investor.
"Share prices remain in a corrective phase, but the downside risks appear mostly priced in, and REITs are generally trading below NAV," he said.
REITs are going to be sensitive to movements in global equity markets, lingering concerns of new virus cases, and the threat of renewed government lockdowns, Everett explained.
"So, we feel there will continue to be very divergent performance by property type in the near-term," he said.
"Long-term, though, we believe strategic allocation to REITs make sense as these companies will revert to lower volatility levels and more durable defensive profiles."
The recovery of property assets is likely to be choppy and will be prolonged by persistent COVID-related issues but opportunities do exist, he maintained.
"The property and portfolio decisions of the last 5-10 years will drive performance and we are likely to see more differentiation than at any point since the GFC," Everett said.
"However, new opportunities will present themselves and active management remains important. The key will be a careful assessment of demographics, long-term drivers of demand, and entering at the right price point."