Credit and real estate experts have described the differing degrees to which the pandemic has affected markets and the extent to which the memory of the GFC has affected the recovery.
Speaking in a session on domestic credit lending, CIP Asset Management head of acquisition David Hoskins said that while the overall speed of recovery asset classes has been quick – 12 months as opposed to two years after the global financial crisis – that speed has “really varied” by sector.
“We’ve seen retail bounce back quickly with the trend to online. Then we’ve seen other sectors we thought would be resilient have been more impacted like childcare because of the increase of people working from home. Then other sectors we thought were in decline, it actually accelerated that decline, if we think of cinemas and the growth of streaming services,” Hoskins explained.
With that overarching view, Hoskins added that existing investors have also heavily retreated to domestic markets. “That’s exactly what we saw in the GFC,” he said.
According to Benefit Street Partners senior portfolio manager and head of real estate Michael Comparato, the credit market is “slowly coming back” in 2021. Like Hoskins, however, he emphasized the uneven nature of the recovery.
“People began lending again in multi-family in the middle market probably in the early to mid-fourth quarter of 2020, and we’re slowly started to see people dip their toes into hospitality lending, office lending,” Comparato explained during a session focussed on pandemic dislocations. “There is still a lot of uncertainty out there, we’re seeing them tread lightly but they’re slowly coming back.”
Comparato said most asset classes actually performed “fairly well” during the pandemic period, other than the hospitality and to a lesser degree multi-family real estate and associated credit.
“Multi-tethered and multi-family that’s a little more tied to the overall economy have struggled a little in terms of rent collections and then obviously closed malls have been on a slow steady train wreck of a decline for quite some time,” he described.
Even within sectors, subsectors experienced vastly different fortunes during 2020, he continued.
“The large loan credit market was not affected materially at all, however the middle market was absolutely decimated, Comparato explained. “The middle market is really a collection of smaller, under-capitalised debt funds and smaller community banks and when things like pandemics or GFCs hit they do not have the wherewithal, the balance sheet or the relationships to get through those times.”
One sector that has made a significant and likely permanent change is shift out of traditional major cities, Comparato observed. High-tech cities like New York and California will continue to lose people and business while high costs pervades, he said.
“Look at Texas, Florida, they have 1,000 people a day moving into those states,” he said. “I do not see anything reversing this trend in the foreseeable future… As the population moves the businesses move. Capital goes where it is welcome and it stays as long as its welcome.
No blanket assumptions
Such is the variance across sectors performance during the pandemic, Cheyne Capital head of real estate credit Ravi Stickey warned the audience against homogenous assumptions, especially in real estate.
“I think the tendency to blanket the performance of all real estate asset classes for covid is probably not correct,” he said.
Anything linked to retail real estate has certainly suffered, Stickey agreed, and the office sector has clearly pulled back. But pinning this purely on the pandemic would be akin to false attribution, he believes.
“A lot of the changes in valuations and usage we’ve seen have been driven not so much by the pandemic itself but rather from investors appreciation of the structural changes and how we may price real estate going forward not just in the coming years, but in the coming decades as well,” Stickey explained.
Debt may be “a different story”, however. After being tarnished with the same brush after 2008, real estate debt has “retrenched” in terms of risk profile and the leverage held REITS, he explained.
“Coming into this part crisis I don’t see real estate debt being overstretched; perhaps because of the prior crisis that caused that retrenchment in the first place.”