Real Estate Market Sector Gaining Strength During Quarantine

RIO DE JANEIRO, BRAZIL – The Covid-19 pandemic reached all social and economic levels of society and also had an impact on the real estate market.

Analyzing the three main business real estate sectors – corporate offices, logistic complexes, and shopping malls – it can be stated that the logistics real estate market was the most stable and, in certain areas, it was even boosted during the crisis.

Government and isolation restrictions did little to change the dynamics of logistics, which encompasses the use of real estate and cargo transports – in contrast to shopping malls and offices, which were directly impacted.

Even before the crisis, companies operating in e-commerce were found to represent a growing share among tenants of logistic complexes in Brazil.

And, over the past three months, e-commerce has established itself as a solution, driven by social distancing and the need for people to maintain their consumption habits.

To meet the demand that arose virtually overnight, companies adjusted their operations and invested in logistics in several ways. Some invested in order fulfillment and marketplace, others in the Post Office, product drive-thru, deliveries by courier apps, among others.

The e-commerce sector was the greatest contributor to new rentals in high-end logistics properties during the pandemic period. The most important leases were signed by companies that are linked to this type of operation.

According to studies, these trends reflect companies’ need to improve their logistical performance, reduce freight costs, and increase product storage area. Many of the companies that mention the e-commerce issue as a great solution at the moment, note that we are still far from equally the sales made in physical stores.

As noted, the e-commerce market is still recent in Brazil. When comparing to the consumer market in the United States or Europe, we realize that in Brazil, e-commerce is only used by a very small portion of the population.

On the other hand, people who adhered to this consumer model due to the pandemic are enjoying the experience, and many report that they will surely maintain this habit after the pandemic.

Renegotiation of rents

Analyzing companies’ rental contracts in logistics complexes, one observes that there were actually many requests from tenants for a reduction in rent during the pandemic period.

In general, owners were open to dialogue and many offered to consider the matter. However, several landlords said that before the discount was granted, whether or not the tenant’s operation had indeed been impacted by the pandemic was analyzed.

In contract negotiations, the following options were considered:

• Partial reduction of payments during the pandemic months, this reduction being levied in the months following the end of quarantine enforced by the government;
• Partial reduction in payment, with an increase in the termination fine if brought forward;
• Short-term grace period for rent, with the option, in some cases, of adjusting the rent upward after this period.

Tenants who were not directly impacted by the pandemic were denied their claims for rental reductions.

The return on investment

The demand for logistics complexes is recent around the world, but it is growing on a large scale every year. In Brazil, the implementation and development of this type of property has grown stronger in the last decade.

Being a relatively new segment, there was still a certain degree of suspicion regarding the risks involved in this type of operation.

However, during the pandemic, the strengths and relevance of this business model became all the more obvious. Today, it is already considered one of the most resilient and promising in the country.

There is a projection of an increase in the selling price per square meter of logistics property, either because of the scarcity of this type of business and the resilience in facing crises, or because of the search by investors for better returns, since the basic interest rate (SELIC) and the financial investments are below the return of a typical real estate investment of this type.

Should this be the case, a stabilization in these properties’ rate of return (Capitalization Rate) can be expected, leading these amounts to be closer to those seen in other types of investment properties, such as the corporate floors sector.

Source: InfoMoney

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