The global pandemic, oil price wars, and subsequent supply chain disturbance – what we’re dubbing as “the trio” – are hitting our economy hard, with most sectors feeling the hit. Being in the PropTech sector for over 4 years, we’ve explored at Ajar how this economic crisis is affecting the real estate industry, drawing on the strategies being followed by our veteran Real Estate clients to maintain the health of their real estate portfolios.
Real estate owners are typically long term investors, seeking consistent cash flow from their portfolios. When the economy is doing well, this strategy is simple – your units get rented, your tenants pay on time, and the cash flows in every month covering your cost of operation.
It’s when the economy is in a downturn that every real estate owner needs to figure out how to maintain the health of their portfolio and secure a steady cash flow. The economic challenge we are facing today is different from any other challenge we’ve faced before. It is not the financial sector that’s pushing our economy down, but rather external factors – primarily the trio – that are reshaping the structure of our economy.
Every real estate investor will be negatively impacted by these circumstances, each differently depending on their exposure to different economic sectors.
Identify and act on your strategic focus
A real estate owner during an economic downturn has to keep an eagle eye open for opportunities. You have to identify and capture the right opportunities that serve your own goals and strategic focus.
There are several incentives to act upon. Examples include the historically low interest rates and the fluctuation of foriegn currencies. These factors can affect your acquisition of new assets locally or internationally.
Make sure that whatever decision you make will contribute towards your optimal portfolio. It’s difficult to predict the market’s behavior right now, but as the US National Association of Realtors is expecting a 10% decline in home sales in the next few months, it is not advisable to rush in making any buying decisions as uncertainty is still high. Just be willing to bear some down-side pressure in the property value after you close your purchase deal.
A crucial part of your strategy will be on managing your portfolio’s cash inflow. The worst thing a real estate investor might experience during these times is cash inflow that is below their operating expenses. In addition to affecting your operating cash, such a scenario will drive your property value down. If you’re thinking long term, make sure to sustain and maintain your tenants by supporting them through these tough times so they can pay you back generously when times are better.
In today’s market, real estate owners are chasing tenants not the other way around. It is very difficult to find replacement tenants for your units as the economy is also affecting household income. Maintaining your tenants signals strength and the ability to forgo cash today for multiples in the future.
Understand your tenants
While crafting your strategy, look into the tenant demography you have. Are they residential or commercial? Within residential, who is the main employer? Government and semi-government sectors or SME’s? And within commercial, which sectors are you exposed to? Food & beverage, consumer retail stores, or corporate offices? Having answers to these questions will give you a better idea of how much of your portfolio will be impacted by the economic changes.
Consumer facing industries are going to be most impacted by the trio, especially with the social distancing being practiced as a result of COVID-19. If you have exposure to F&B businesses, retail stores, or salons, then most likely they are currently thinking of ways to cut their rent obligation.The technique in this scenario is not to lose your commercial tenants. Make sure that you support them or your occupancy rate will be affected.
We have seen the majority of our clients at Ajar support their commercial tenants through one-time 50-75% rent discounts, voiding a month’s rent, or postponing payments till the end of the year. You can be creative with the solution, just ensure that you have the right tools to do it seamlessly and legally, and are able to track the impact.
Be aware of the legalities
Keep track of all government announcements, and understand their legal impact on your portfolio. For example, the Kuwaiti government announced the closing of certain services such as beauty salons and retail shops. This meant that commercial tenants who were negatively affected by the announcement were eligible – by law – to not pay their rent for the month.
Make sure that your real estate advisor advises you on such event changes on a regular basis. At Ajar, we monitor the real estate market on an hourly basis and keep our customers informed on events as they happen. We also provide them with a clear breakdown of their portfolio composition into units by type.
Prioritize seamless collection
Rent collection is a core function that real estate owners have to handle. Make sure you’re offering your tenants a seamless and theft-proof way to pay rent. Ensure that collection can run regardless of bank holidays, or even worse, tenant quarantines caused by COVID-19. Cheque, cash, and POS machine payments suddenly pose a threat to public health. COVID-19 has an unknown lifespan, so ensure that your payment process can function even with such disruptions to economic and societal norms.
Digital payments are no longer a luxury, but a necessity. As a real estate owner, you must provide an online payment option for your tenants. Make sure to opt for a regulated platform you can trust. Ajar is trusted to collect around 14% of the rental market in Kuwait, and is rapidly expanding in the UAE real estate market, too.
Control your costs
The math is simple: the lower your cost, the higher your margin.
Since the state of the market requires you to offer incentives and discounts to your highest paying tenants (i.e. commercial tenants), then controlling your costs is essential to avoiding negative returns.
Automation is the oldest and most resilient trick here. Automate your collection, reporting, and even tenant relationship management. Find a tool that will save you time, energy, and resources by sending auto-reminders for due payments, auto-reconciling your payments, and opening a seamless line of communication with your tenants. We’ve seen our clients cut their administration costs by 80% with such features.
The moral of the story
You don’t have to experience losses in an economic downturn. It is a time when new opportunities are created. Be alert and ready to capture the opportunities that match your strategy. The phase we are heading into will define new norms. Make sure your portfolio is one step ahead.