How Real Estate Investing Is Changing in the ‘Untact’ Era

The industry will need to adapt to an increasingly contactless operating environment, but managers should stick to their investment programs with four key considerations in mind

COVID-19 created once-in-a-lifetime headwinds for global private capital markets. With whole countries forced into isolation, the pandemic all but stopped human contact and changed the way individuals carry out their daily activities. It is therefore unsurprising that this virus had a massive direct impact on the commercial real estate market around the world: only about a third of the usual transaction volume was recorded in Q2 2020. Since physical due diligence was and is still virtually impossible in many countries, investors had to postpone the closing of their ongoing deals and projects for most of last year. This motivated investors to divert their focus toward local markets, causing the real estate market to ‘deglobalize.'

Despite the ongoing economic disruption, it is important for fund managers and investors to maintain continuity in the investment process. As everything from business operations to investor communications evolves to become more resilient in a post-COVID-19 world, even with the development of a viable vaccine, industry players will need to adapt to the growing influence of the ‘untact’ or ‘contactless’ environment.  

In particular, there are four considerations that are becoming more important to commercial real estate investing today.

1. Leveraging Globalized Local Partnerships
A local investment expert with sufficient global experience may be the key to obtaining the best market opportunities worldwide going forward. The pandemic has brought to light the real challenges of accessing and managing investments abroad as an investor – especially in times of uncertainty. Under the current circumstances, it is extremely difficult to invest in foreign markets directly. Close collaboration with a local expert in a region of interest can be key to overcoming many of these barriers and quickly engaging in active international projects. That said, it is imperative that this first-hand local perspective is combined with sufficient knowledge and experience dealing with global projects. Without this, international collaborations can quickly become inefficient and laborious.  

2. Embracing Diversified Modes of Due Diligence
In today’s era of technology, physicality should not be a hurdle to global investment efforts. Due diligence methods need to become more flexible to adapt to the evolving needs of industry stakeholders. In addition, the pandemic has encouraged the transformation of due diligence processes to help ease the burdens around site visitations and traditional face-to-face interactions. These changes are likely here to stay: despite best efforts, COVID-19 could bring new waves of infections and fresh restrictions from governments at any time, keeping these recent difficulties top of mind for all firms. Going forward, a more diversified approach to conducting due diligence could become commonplace. Leveraging virtual due diligence, joining forces with local partners to conduct due diligence on behalf of investors, or forming Conditional Commitments with additional precautionary clauses may all be increasingly utilized options.

3. All-in-One Communication Tools Will Be Key  
In preparation for the rising prevalence of remote investment activities, fluid communication channels should be created between all participants – such as investors, advisors, and property managers – throughout the various stages of the investment lifecycle. As we all know, the industry is currently benefiting from various ‘untact’ methods of communication such as online video conferences, emails, shared cloud folders, digital document signings, and much more. The growing utilization of these digital tools is creating new challenges. In order to eliminate the inefficiency caused by the time difference between countries, and to streamline the exchange of information more effectively across platforms, the consolidation of communications into an all-in-one channel for the immediate and secure exchange of information regarding a single investment project will become more important.  

4. Secondary Market Liquidity, a Growing Concern for Investors
Since the Global Financial Crisis, private real estate fund investment has increased dramatically. This surge in assets under management over the past decade makes sense amid one of the longest economic expansions in history for the US, and given the positive influence this has had on international investment markets globally. Even in an outperforming market, investors in real estate cannot avoid liquidity concerns. However, in times of uncertainty and volatility these considerations are more acute. Real estate investors may face shrinking expected returns in environments like this caused by declines in property values, increasing the likelihood of investors seeking investment liquidation for various needs.

In these circumstances, when one investor has a negative outlook on the market, it is currently not easy for them to take any further actions due to their lack of liquidity. If, however, there were more liquid options within the real estate market, this may better satisfy the various appetites of different investors. To enhance the liquidity in the private market, first, more open-ended funds should be launched. In order to make this happen, the secondary market will need to be dynamic with timely transactions – just like already well-traded REITs. Moreover, listed REITs have the benefits of transparency due to information disclosure duties existing in public markets. REITs address many of the concerns mentioned to the benefit of individual investors, but much more will need to be done to adapt to the growing focus on liquidity needs in private markets.

Outlook for Asian Real Estate
From our vantage point in South Korea, we have witnessed the resilience of the real estate industry in Asia first-hand last year. Although this region was the first to experience the full force of the virus, far ahead of Europe and the US, some Asian nations were also among the first to subsequently emerge from isolation measures. In fact, some countries in Asia avoided lengthy official lockdowns all together. Similarly, the slump in Asian real estate activity in the first quarter of 2020 did not last long either, with transaction volumes recovering at a prompt pace in the second quarter last year.

We have seen a pick-up in domestic activity among local investors with abundant levels of capital, and this has favored asset sellers. Take Korea for example. Prime office transactions held up well, even setting new records on a price/m2 basis in some cases. Sectors that were expected to underperform also did well, like the hotel sector where the transaction volume increased year over year – driven by a few mega deals during the year. Transaction volume for the retail sector in Korea has also increased year over year throughout the first half of 2020, mostly due to investors purchasing these properties for conversion into residential living spaces or other purposes.  

As the numbers show, Asian economies have bounced back remarkably quickly and, in turn, so too has the real estate industry in this region. Contrary to some expectations, the peak of the real estate cycle in Asia seems likely to continue. Furthermore, investors can still benefit from exposure to this asset class in the region. Investment opportunities in markets like Korea and Japan can offer stable income, for example, while Australia could provide access to discounted assets.

About Hana Alternative Asset Management 
Hana Alternative Asset Management (HAAM) was the first real estate asset management company established in South Korea. Our expertise is in core and core-plus strategies, with fast-growing value-added and opportunistic investments. HAAM is part of the Hana Financial Group, one of the four largest financial groups in South Korea, which has a strong global presence with 214 branches in 24 countries. HAAM is continuously looking for growth opportunities globally to extend existing relationships worldwide.