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Commercial property remains an attractive asset class despite the coronacrisis

UK

Commercial property remains an attractive asset class despite the coronacrisis, but it is important to know which property types to invest in

In a new analysis of commercial property as a strategic investment portfolio component, Colliers studies which property types to opt for in crisis situations. This is of great topical interest due to the ongoing coronacrisis. The analysis indicates the COVID-19 impact on five different property types.

Colliers has analysed the COVID-19 impact on the following types of property: Residential, office, industrial & logistics, retail and hotel properties.

“We experience that investors have become more cautious and seek advice on how best to align their investment strategies with the situation at hand,” says Peter Winther, CEO Colliers.

Which investment properties to opt for in crisis situations is largely determined by the level of correlation between property returns and general economic trends (GDP correlation). It varies quite considerably on which scale cyclical fluctuations affect the returns on different property types.

Hotel property bears the brunt

“Hotel properties are among the properties generally bearing the brunt of a recession. The hotel market is widely driven by tourism, conferences and similar factors. At the moment, they are hit twice over, so to speak, because not only has the economy come to an abrupt halt, but the borders have also been closed, causing the number of bednights to plummet overnight,” says Peter Winther.

At the other end of the scale of cyclical impact, we find residential properties.

“As far as residential properties are concerned, it is a different and brighter story. No matter how much the crisis bites, people need a roof over their heads. Residential properties in large cities and growth centres will therefore always be a sound investment as they are less susceptible to economic volatility,” says Peter Winther. 

COVID-19 impact on various property types

Residential - GDP correlation is low. COVID-19 impact is very low. The housing market is widely driven by demographic trends and household finances. Financial turbulence may result in delinquent mortgage loans and a drop in ownership housing prices and, by extension, a shift towards rental housing. 

Office - GDP correlation is low to moderate. COVID-19 impact is low. The office market is to a great extent driven by employment levels in office-intensive industries. Mainly small businesses are likely to be affected by crisis situations, whereas major businesses are more inclined to focus on internal processes and restructuring.

Industrial & logistics - GDP correlation is moderate to high. COVID-19 impact is low. The market for industrial and logistics facilities is predominantly driven by economic trends. In terms of logistics facilities, consumer spending via online sales is key, while industrial facilities are susceptible to underlying export growth and consequently production. 

Retail - GDP correlation is high. COVID-19 impact is very high. Cyclical fluctuations affect retail properties in different ways. While grocery stores are only affected to a minor extent, shopping goods stores and the F&B sector are highly sensitive to changes in consumer spending, which typically drops considerably during times of crisis.

Hotel - GDP correlation is very high. COVID-19 impact is exceptionally high. The hotel market is considered the property market sector that bears the brunt of cyclical changes. This is because the hotel market is driven by factors such as consumer spending, conference, etc. and tourism.

Although it is generally possible to achieve substantial diversification gains through minimised volatility and risk by including commercial properties in the investment portfolio, it is in times of crisis, like now, even possible to achieve additional benefits by investing in the least cyclical property types.

Read the full analysis here 

 

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Peter Winther

Executive Director | Partner | MRICS

Copenhagen

Peter is Executive Director and heads Colliers’ Danish Investment & Capital Markets teams. Peter provides strategic property consultancy services and facilitates the sale of commercial and investment properties, including hotels and shopping centres, as well as property portfolios and companies.

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