Elkstone Real Estate

Elkstone Real Estate May 2020


We are living in challenging times. All of our plans and assumptions have been overturned. In February, the Irish economy was humming along with 4.8% unemployment and in April it was 28.2%, an almost 6 times increase. In the US, which had unemployment below 4% now has 36.6 million unemployment benefit applications. For most countries the sudden change is similar.

Market commentators have different beliefs in describing what a recovery might look like. Some say a “V”, a “U”, a “W” or an “L”. The latest one that I have seen is the Nike Swoosh. Given the range of alphabetic predictions it’s clear that no one feels certain what shape the recovery will take.

Our view is to position ourselves for a period of uncertainty but be ready to move as the shape of the recovery becomes clearer.

Seán Blank is a Manager on the Elkstone Real Estate team


The New World

(Image Source: FT.com)


Period of Uncertainty

We believe that we are facing into an immediate period of deflation. There is clearly excessive capacity in the labour market and undoubtedly there is and will continue to be a drop in demand. Therefore, it seems inevitable that the price of goods and services will have to drop.

In the medium to longer term there are however strong inflationary pressures:
• Excessive money printing – due to global monetary and fiscal easing.
• Supply Shocks – a result of the deglobalisation of the supply chain due to trade wars and now exacerbated by Covid-19.
• Increase in the cost of commodities – a recovery in commodity prices (from their current lows) over the next number of years.

At Elkstone, our view is a short period of deflation followed by a longer period of inflation.

What does this mean for real estate?

Needless to say, Retail has been the most fragile sector and was vulnerable prior to Covid-19. The pandemic has merely accelerated those frailties. However, not all retail has been hurt badly. Grocery-anchored retail has proven to be valuable and resilient and we expect this trend to continue. Therefore, retail parks (those without internal communal areas) that are easily accessible (out of town with ample parking) should perform well relative to the rest of the retail sector.

The office market is being questioned and we may see the end of long-term leases to be replaced by shorter more flexible leases. There is also a view that technology has enabled working from home to replace working from the office. This we believe is likely to be an exaggeration. The layout and focus of the office itself may change and longer term, working practices may change to facilitate increased remote working. But we believe this is be part of the “new” working realities rather than a replacement of central office facilities. There are numerous reasons for central office spaces not least for creativity. Our view is that offices serve as a hot bed for knowledge transfer and innovation. Numerous studies have shown that innovation is best served when teams work together in the same space. We therefore believe that while there will be uncertainty around the immediate stability of the office investment market, calls for the ‘death’ of the office is overplayed.

The rental sector will prove to be resilient. The underlying fundamentals in Ireland and in particular Dublin should maintain a supply/demand imbalance despite a drop off in demand. We believe that the current trend towards working from home will direct traffic to purpose built rental accommodation which has well thought out communal areas that facilitate a work from home office.

There will however be a drop off in the supply of private homes as the drop in valuations will render some (if not most) developments unviable – developers were already working to extremely tight margins.

Student Housing
Student housing (PBSA) epitomises that nothing is immune to this pandemic. PBSA has attracted large pools of capital because of its defensive characteristics – education is non-cyclical and therefore there should always be demand for PBSA. Obviously PBSA will experience a period of destabilisation. However the asset class will we believe return to normal operating and resume as a solid investment class.

To conclude, there is uncertainty in every asset class. In the near term the question will be whether that uncertainty has been appropriately priced. We believe that there will be significant opportunities in the real estate sector to capitalise on dislocated prices.