How can GCC real estate companies lay the foundations for recovery?

Published: 8 May 2020 - 9 a.m.

The GCC’s real estate sector has been struggling in recent years, with property values and real estate companies’ valuations falling significantly. The recent dual shock of COVID-19 and sharp decline of oil prices has exacerbated these problems.

In this article, Ramy Sfeir and Karim Abdallah, partners, Charly Nakhoul, principal, and Zahi Awad, manager, with Strategy& Middle East, part of the PwC network offer their perspective can initiate a recovery of the GCC’s real estate market.

In response, many companies have launched prompt measures focused on physical safety and financial liquidity to ensure business continuity.

Yet to mitigate the fallout and emerge from the crisis in a position of strength, companies must do more. They should prioritise two sets of measures: stabilising the business, and strategising for the rebound.

Stabilise the business during uncertain times

Companies can take several actions to stabilise the business and ensure resilience, starting with their financial foundation.

They should continue to shore up their balance sheets and closely manage liquidity. Firms should proactively approach their debt providers to renegotiate existing terms, while exploring a possible capital infusion from shareholders where possible.

To further enhance liquidity, companies can create a fund to offload assets at valuations that are attractive for buyers and market it as a haven, thereby allowing small investors to benefit from exposure to the real estate market and from a strong rebound.

Companies should also take advantage of extended government support, while sharing these benefits with suppliers, tenants, and employees.

In terms of operating costs, leadership teams can make bold decisions to close temporarily underperforming assets and consolidate supply, such as for hotels, in line with changing demand patterns.

They should also protect their staff and retain top talent by assigning them to critical tasks.

Companies should continue to engage with customers and find creative responses to the current crisis. For example, they can offer deferred lease payments to struggling tenants, or adopt revenue-sharing models with vulnerable retail operators.

For residential customers who have purchased property in stalled projects, companies can offer swaps with other units in completed projects that have outstanding inventory.

Companies could also focus more on rent-to-own packages as a hedge for slow sales.

To rebuild trust with consumers, companies should also redesign journeys to enhance hygiene and safety standards, and to enable omnichannel experiences.

Companies should define phased plans to re-open their assets, especially those expecting high demand. Firms should also make bets by investing in undervalued, but promising ventures.

Strategise for recovery once the crisis eases

Companies also need to strategise for when the crisis eases. That entails understanding and adapting to changes in consumer behaviour.

For example, the surge in remote working will likely require companies to review their offerings in residential and office properties.

They need to rethink residential products to include working spaces. In addition, when creating communities, developers will need to further emphasise the presence of integrated essential amenities such as grocery stores and pharmacies.

With companies likely requiring smaller offices, commercial owners should offer more flexible lease terms, and test “office as a service” offerings with modular spaces for short rental periods to manage volatile demand patterns.

In retail, online shopping is already surging, requiring less space for traditional retailers’ showrooms.

In their place, designs can include increased entertainment, food and beverage, and experiential elements, with some allocation for distribution centre functions to enable e-commerce fulfilment.

In hospitality, the increase of remote working will likely reduce business travel, and international tourism will take some time to pick up.

Hospitality asset owners who previously focused on these segments may need to reorient their offerings to cater for an expected growth of domestic and regional tourism instead.

More broadly, the rising importance of business continuity and country-level self-sustainability might result in new regulations that seek to encourage local production in key sectors.

This could result in companies shifting their talent away, sending staff away from concentrated regional hubs and instead dispersing them.

For real estate companies, that would result in a redistribution of demand for office and residential space.

The real estate sector will remain a vital engine of growth. Although the environment has become less predictable, companies can succeed by reinforcing their core capabilities in asset management, becoming lean and agile to decide on and implement changes more rapidly, and enabling themselves through digital transformation.

The article is written by Ramy Sfeir and Karim Abdallah, partners, Charly Nakhoul, principal, and Zahi Awad, manager, with Strategy& Middle East, part of the PwC network

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