Interview Daniel While

June 3, 2020

Ben Tannenbaum

Full transcript

Hi, I'm Ben, the CEO of coworkintel the data source of reference for flexible workspaces. Today we have Daniel While head of research and strategy at Primonial REIM a leading real estate fund manager in France and one of the fastest fastest-growing in Europe. Hi, Daniel.

Great to be here.

So Daniel let's start with giving some context on the impact of the virus on the real estate sector. Given the broad exposure of Primonial You have an overview of the real estate sector as a whole including flexible work spaces. Have you observed any difference between residential and commercial long lease and flexible

Well, first of all, maybe we have to take into account that in my opinion. we are seeing a three-stage crisis. The first stage was about basic rental revenue collection right during the lockdown and in this respect we of course had difficulties with retail: 90% of rent collection problems  was with shops or shopping centers, very few on offices, none on residential. So clearly in terms of the first stage - the renting collection stage of the crisis during the lockdown  - the issues were quite centered on retail and hospitality of course, but now we're entering the second stage which is modeling through a recession.

So that will be much more - that's your broader impact on all asset classes because of course a recession has direct or indirect effects on residential and commercial and then you've got the third stage, which is the change in the practices of tenants typically remote working. So we are  getting prepared for that.

So in my view, we haven't yet entered the stage of the crisis where we will have to see the impact on all asset classes. Today it's very focused on retail and Hospitality there will be an impact. There will be an impact on rents.

There will be an impact - in my opinion lower impact - on values. We hope there won't be any impact on liquidity because that would be crucial for the future of the real estate industry and to answer your question about the leases today.

Basically, the typical trend has been  a trade-off between lowering rental values against expanding leases. So we are not yet in the stage of tenants who asked for shorter lease today.

We are rather in the stage where tenants are asking for extension of leases in exchange of let's say some free leases of some month, or free payments or all kinds of trade-offs that we can do to make them pass this difficult period so we are not yet in the stage where companies are considering their real estate policies yet.

We don't know what we are going to do with tenants who say: listen I'm going to have much less needs in terms of office space." We're not confronted with that yet. Okay, understood. You are based in Paris. You are one of the Occidental markets that was most hit by the current crisis.

Could you tell us how it started and how I reacted to it so far. Well technologically speaking, there is no real issue with doing a transaction during the lockdown we can sign acquisition we can sign an SPA

The only thing we couldn't do is visiting of course the properties but in every case where we had visited and where the due diligence was was positive, we completed, we executed transactions including during this lockdown. Now both most investors and most operators and most most tenants with which I speak are in a wait-and-see position clearly. They are waiting for let's say  to have more visibility on what will be the future what we haven't seen for example is forced disposals, you know, or governance problems, governance issues.

We haven't seen that yet on the Paris market and fundamentally at Primonial we manage funds we didn't have the same issues that for example some UK funds had with valuations, you know, because some appraisals were contested because there was a lack of materiality but in the French GAAP, in French accounting rules, you don't have too much of this problem because we don't believe that even if there are fewer transactions during an exceptional period we should put liquidity premium on all assets so values in my view will be essentially hit through cash flows.

But no liquidity issues which of course is crucial for the future. Yeah, and then, and you've touched on this a little bit already, but depending on the sub-sector, have you residual demand

Perhaps have you seen some sector where the demand actually even increased?

And if not, when do you anticipate things will start to improve? Well, the Paris market take up in offices is typically around 2 million square meters per year.

I expected it to fall. Let's say between one and 1.3 million square meters in the 2020s, which is quite a sharp decrease. But the good news is that Paris what we called intramuros, which is not quite CBD, but what is within the Paris Frontier materialized by the Peripherique roads who controls Paris rim, in that area vacancy rates are very low there below 3% and the risk premium in terms of values is quite high it's about 300 basis points so in term that you can compare that to the GFC the great financial crisis where they can see rates were about six percent and the risk premium was close to zero so I would say we have some we have a bit of slack on rental values and on asset values So I think even if demand will fall in 2020, I don't say rental values or asset values falling in the same proportion.

Now, of course if we are headed for Great Depression scenario, of course all bets are off, so we are in the hands of public policies now and especially European public policies, but eventually I believe we will see I think we will escape the Great Depression I think we will have a recession a very hard recession obviously, a slight Improvement in 2021 and I believe a full-blown recovery when the vaccine is found.

Yeah, that makes sense. Changing a little bit the subject, one of the most challenging things I imagine is the relationships with your investors or lenders what has been situation, are there  any recommendation you can make on that front. As I said

I think most are in the wait and see attitude. I think that both investors and lenders have been quite mature in this crisis because it is a total crisis. It's a crisis. No one can escape. It's not even a real estate crisis. It's a total crisis.

We're all in the same boat. So I think broadly speaking the attitude was was cooperative. But my recommendation would be: communicate. Communicates the maximum because what really worries investors is actually the fear of being left alone, of being rolled in the market. I think they could manage harsh news if we if we are upfront about it.

And basically I mean we didn't have any difficulties explaining why to our investors that in retail there would be some free leases or that of course, we couldn't expect as much rental revenue as usual.

All the investors actually were quite understanding. On that lenders did what lenders do that is they the apply a superior risk premium, about let's say 50 basis points.

Okay. So financing in commercial real estate is in Paris is a bit more expensive. But we are still at very low rates obviously so I would say today, we're in a in a wait-and-see / understanding attitude.

OK let us look a little bit forward now, how do you think the e industry and in particular the flexible part could position itself to benefit from the post lockdown period or at the very least recover some of its losses.

Well basically as far as flexible workspaces are concerned operators have as a liability long lease and as an asset short leases, so it's normal that they are pressured in times of crisis. I'm not very worried about social distancing because I think they are innovative enough to adjust to the social distancing healthy practices.

I think technology can help so I'm not too concerned about the technicalities of social distancing for all the flexible office.

Now in the long term, in contrary to what we see in Anglo-Saxon countries, I don't see French tenants completely shifting to remote work or work being at home because I think they will use remote work out of a financial rationalization perspective, but it's optimization, it is not transformation.

So I see a mix of let's say traditional office practices of home office, of co-working, of course, there's a trade-off between financial optimization and keeping its hand on the employees.

I mean remote work is something that succeeds sometimes and fails sometimes, see the examples of Yahoo, see examples of IBM. So I would say as investors. We will have to sharpen our focus on flexible optimal building that can integrate a certain dose of of co-working, that have ratio number of number of square meters per employee, which is low but are flexible technically spaces can be converted into services, but I don't see a replacement of a model by another I would say. It's foor major tenants anyway and Paris is a market of major tenants. It's  optimization, but not transformation.

Thank you. That's very good Daniel. Thanks. Thanks very much, and thanks a lot.

Thanks for the invitation. Thank you.

All the best.