One question experienced investors and consultants hear a lot is: what can I invest in with limited risk? I hate to disappoint, but there’s never been a fail-safe answer. Given the current Covid-19 pandemic and the knock-on effects on real estate, formulating a clear-cut answer has become even more difficult.

Broadly speaking, we can say that this sudden change at the global level is fuelling wide-scale uncertainty. That gives us a general picture, but offers no firm basis for predicting what will happen in specific sectors like logistics, retail or residential real estate.

One solution is to look at the underlying long-term fundamentals of a sector. After all, the key aim of investing in real estate is to generate a stable cash flow. That cash flow, in the form of rent, comes from a business‘s revenue. Retailers are a good example. As long as a retailer continues to bring in substantial revenue, they’ll continue to pay rent. However, if income falls short, sooner or later they’ll ask for a rent reduction or possibly go bankrupt.

Aside from analysing a business’s income flows, there’s another element to consider: what are the alternative operating locations for a particular business? To use the retailer example again, increasing vacancy rates mean most retailers will have more options for relocating to other premises nearby. The consequence is declining rents, less cash flow stability for investors and diminishing real estate values. 

Does that mean investing in retail properties is never worthwhile? Certainly not. There are also plenty of retailers that have not experienced a drop in demand, or only a small drop – supermarkets being a case in point.

When measured against revenue stability and availability of alternative locations, we can conclude that these fundamentals are rock solid. Ongoing demand, both current and future, and limited options for relocating to alternative locations translates into stability for the businesses themselves and by extension for investors.

This two-step analysis works equally well for other sectors such as logistics and residential real estate. Without glossing over current developments, we can expect intrinsic demand from occupiers to remain relatively stable in these two sectors over the long term. 

If we look at logistics, there’s no doubt that the upward trend in e-commerce, which already comprises 12 per cent of total consumer spending in the Netherlands, where I’m based, will continue. The only question is how big annual growth will be. In the short term, this growth will be amplified by the decline of retailers with physical shops. In addition, there’s increasing difficulty of acquiring strategic locations, since the stock of suitable sites is limited. 

As for the residential market, there may be an even more stable foundation. The Netherlands‘ population is expected to continue to increase up to 2040. Everyone needs a roof over their head and the country already has a shortfall of approximately 300,000 homes. With construction unable to keep pace, this housing shortage won’t change in the years ahead.

To form a real opinion of the strength of an investment, the main area to focus on is the stability of a sector’s underlying market fundamentals.

Further information

Savills Covid-19 Resource Hub