Dodging distress in the new normal


It was a different summer in many ways this year, including continued investor activity during a period when most would have been taking some time off overseas. However, there has still been a noticeable uptick in interest since the start of September, with both a realisation that the end of the year is fast approaching so it is time for getting new acquisitions secured and a thawing of those frozen while the fallout from COVID-19 was being assessed.

Interest can be broadly split into two camps. Those looking for a bargain with distressed assets, or perhaps better described as distressed sellers, and those looking for defensive options in this new normal.

I have no doubt there will be some opportunities to find bargains, but the question is how long purchasers will continue to view them as bargains once they are the new landlord.

I heard a great phrase this week from a Bahraini group, describing such deals as “income traps”.

The Day 1 income looks great, but very quickly that starts to erode and so does capital value. We will be dodging distress.

And then there are defensive options, providing I would argue still attractive
levels of income, but also prospects for capital growth.

In one of the few international Islamic investments to close over the summer, Qatar First Bank looks to have achieved just that, with the US$41 million acquisition of an office property outside Dallas, Texas and let to sports marketing company Varsity Brands.

Even with defensive assets, many investors are asking what the ‘COVID discount’ is. One sector where there certainly isn’t a discount and there is arguably a ‘COVID premium’ is logistics. We hear talk of values rising even higher and so the Day 1 yield will be even lower.

But, while they are not distressed, we are finding motivated sellers, and while you are not buying for pennies in the pound, it is possible to negotiate a better deal either with a modest discount and/ or better terms, for example the rent guarantees we at 90 North achieved for our Kuwaiti investment partner on our UK student accommodation acquisitions.

So, where the activity of the tenant looks at least stable in this new normal, investors are showing heightened interest in the office, healthcare, student accommodation and of course logistics sectors. Unsurprisingly, retail assets are not holding much appeal beyond the distress seekers.

As we rapidly approach the last quarter of the year, I wish those seeking new acquisitions the best of luck, but do remember that you are not alone in wanting to invest.

Prices certainly are not at bargain basement levels on properties you’d actually want to own. Defensive wins over distressed, at least in my book.

This article was first published in Islamic Finance news dated 16th September 2020 (Volume 17, Issue 37)