Twitter LinkedIn
    Friday, January 27
    Login
    0 Shopping Cart
    Twitter LinkedIn
    Private Equity InsiderPrivate Equity Insider
    • About Us
    • Digital Events
    • Our Network
      • Reach
      • Sponsors
      • Members
    Private Equity InsiderPrivate Equity Insider
    Home»Investments»The world’s CFOs have a dire message for real-estate investors
    Investments

    The world’s CFOs have a dire message for real-estate investors

    December 23, 2020Updated:December 28, 20206 Mins Read
    LinkedIn Facebook Twitter Email WhatsApp
    Share
    LinkedIn Facebook Twitter Email WhatsApp

    Property investors are about to discover just how much the global fallout from the coronavirus pandemic has spread from deserted and cast-off buildings to their bottom lines.

    Hundreds of corporate executives tracked in earnings calls around the world in the past five months addressed the urgency to cut real-estate costs, according to an AI model trained by Bloomberg to scour transcripts. Tactics include cutting office space, accelerating branch closures, renegotiating rents on warehouses and even shutting data centers.

    In 4,767 global earnings calls between July 21 and Dec. 8, about one in eight machine-generated transcripts revealed that firms were rethinking their real estate needs, with many on track to save millions of dollars in the process.

    While the pandemic has squeezed landlords and clobbered securities linked to commercial real estate, the damage to cash flows stands as the long-tail risk for investors. In an estimated US$10 trillion global pool of properties held for investment purposes, the industry’s main sources of capital — pension funds and insurance firms — count on the steady income to pay for their own long-term commitments.

    “That’s the key rationale for buying real estate. Most landlords are in effect pension and insurance funds and ultimately that’s who is going to be paying for it,” said Adrian Benedict, head of real-estate solutions at Fidelity International in London. “If the whole central tenet of security of income is undermined through this crisis, you are storing up a world of trouble.”

    Investors are already hurting: a global index of real estate shares has shed more than 10% this year as a gauge of all types of stocks surged about 13 per cent. On the debt side, delinquencies on U.S. commercial mortgages climbed to almost six per cent in November, according to the Mortgage Bankers Association. Risk premiums for BBB-rated commercial mortgage-backed securities have almost doubled since the start of the year, according to Bloomberg Barclays index data.

    As the global recession deepens and companies brace for the new normal that follows, business will require less space than pre-COVID. An October survey by the U.K.’s Institute of Directors found that 74 per cent of companies planned to make more use of working from home once the pandemic subsides, with more than half intending to reduce the amount of workspace they use.

    While the coronavirus vaccine has thrilled investors worldwide and sent real estate stocks rebounding, celebrations may turn out to be premature. The kind of changes that officials have been discussing have often been of a permanent and structural nature, with the forecast savings being largely welcomed by company shareholders and analysts.

    “We will implement a hybrid working model for many of our colleagues and reduce our real estate footprint by approximately 12 per cent.”

    — John Kritzmacher, Chief Financial Officer, John Wiley & Sons Inc.

    -Earnings call date: Dec. 8

    -Company description: New Jersey-based education information services provider

    -Real estate footprint: 38 locations globally

    -Estimated savings: $7-$8 million annually from 2022

    Even firms that mainly rent space in cheaper locations are targeting cuts.“We want to save 35 per cent of our square meters at the headquarters,” Jan Juchelka, Chief Executive Officer of Komercni Banka As, a Prague-based lender, said on an August call, discussing the company’s new “smart office, flexible workplace” plan that combines home-working and hot-desking to make radical cuts.

    The pandemic has also served to accelerate the demise of branch banking. Lenders including Tupelo, Mississippi-based Renasant Corp., Amerant Bancorp Inc. in Florida, Zurich-based Cembra Money Bank AG and North Carolina’s Truist Financial Corp. were among those discussing more cuts and closures during the period.

    “We plan to close 104 branches in December and January and are looking at ways to bring forward more branch closures in 2021,” Truist Financial’s CFO Daryl Bible said on an Oct. 15 call.

    Our real estate strategy will “match the footprint to the new expected normal, which, in many cases, reduces our footprint by 50 per cent.”

    — Mark Harris, CFO of Heidrick & Struggles International Inc.

    -Earnings call date: Oct. 26

    -Company description: Chicago-based global executive search firm

    -Real estate footprint: More than 50 locations globally, typically prime city center office buildings

    -Estimated savings: Initial $6 million a year, with an additional US$5-8 million as strategy progresses

    It’s not just offices being ditched and downsized. S&P Global Inc., the financial-information provider, was also planning to consolidate its data centers, CFO Ewout Steenbergen said in a late July earnings call. He said that COVID-19 would “change how and where we work.”

    Despite emerging as a big winner from the pandemic thanks to the explosion in online shopping spurring demand for storage, pockets of the industrial-property market have also been hit. Major customers including airlines have suffered from the collapse in global travel.“We have a team dedicated to pursuing additional cost-reduction initiatives for cash preservation,” Air Canada Deputy CEO and CFO Michael Rousseau said in a July call. “In addition to labor and fleet rightsizing, areas of focus are maintenance, real estate, IT and other fixed-cost areas.”

    “You negotiate and get some relief for times like this. If the situation continues, we’ll perhaps have to extend and ask for greater relief.”

    — Ashish Dikshit, managing director of Aditya Birla Fashion and Retail

    -Earnings call date: Nov. 6

    -Company description: Mumbai-based fashion retailer

    -Real estate footprint: Over 3,000 stores across more than 750 cities

    -Estimated savings: Rent for six months through September dropped about $18 million from a year earlier

    The breadth of the pull-backs is striking. Domtar Corp., which operates paper mills in the U.S., is exploring site closures, while Waste Connections Inc., which operates recycling centers, expects to reduce rents. Even companies in health care, like Tennessee-based retirement home operator Brookdale Senior Living Inc., are securing cuts from landlords.

    “The rent reductions that we received are significant and permanent and they total more than $500 million,” Brookdale CEO Lucinda Baier said on a call in August.

    Many companies’ cost cutting plans are still at an early stage, and will take some time to filter through to investors’ bottom lines. As workers prepare for some kind of return to buildings next year, long-term questions about real estate needs may even grow more urgent as concerns about health, safety and human interaction become more entrenched. “We are going to move into a new world where people have the right balance of working from home and working in the office,” John Rogers, CFO at advertising group WPP Plc, said on an Aug. 27 earnings call. “That will mean that we need less office space going forward.”

    Note: Given the limitations of AI and live transcriptions, the total number of companies discussing real estate costs may be even higher.

    Source: Bloomberg BNN

    Related

    Can't stop reading? This and all news articles are property of their creators, many are not owned or provided by Private Equity Insider. As an event organizer and community platform, we curate content from reliable sources for your suggested reading, and advise you to read the full articles from the referenced authors and sources.

    investors Property Real Estate
    Share. LinkedIn Facebook Twitter Email WhatsApp

    Related Posts

    Carlyle launches renewable energy development platform Telis Energy in Europe

    November 15, 2022

    Partners Group buys data center platform EdgeCore Digital with $1.2B investment

    November 14, 2022

    CalPERS commits $15.2B to private markets

    November 14, 2022

    Ardian reinvests in Italian pharma business Neopharmed, NB Renaissance joins as investor

    November 11, 2022

    Comments are closed.

    Other Articles

    Jack Dorsey chooses Square over Twitter

    November 29, 2021

    Metis raises USD1m seed investment from Waterdrip Capital, DFG, Chain Capital and Angel Investors

    March 4, 2021

    Level E Research closes seed funding round, raising GBP1.2m from group of private investors

    April 9, 2021

    Maverix Private Equity Announces Team Additions

    May 4, 2021

    Private Equity Insider LLC
    1212 Avenue of the Americas
    New York City 10036
    USA

    [email protected]

    Twitter LinkedIn
    © 2023 Private Equity Insider LLC. All rights reserved.
    • About
    • Terms of Use
    • Cookie Policy
    • Privacy Policy
    • Contact Us

    Type above and press Enter to search. Press Esc to cancel.

    View Cart Checkout Continue Shopping

    Sign In or Register

    Welcome Back!

    Login to your account below.


    Lost password?