Coronavirus - Changes 2020 Global Real Estate Outlook

GRI Club (an exclusive private membership platforms for the world’s real estate investment, development and lending communities) hosted a series of online eMeetings in order for members to come together at such a critical time of fear and uncertainty to make sense of what impacts Coronavirus might have on real estate and capital markets. The prevailing view was on the whole positive, as many took a cautiously optimistic view that we would see signs of recovery within 12 months. Key themes emerged from the frank discussions; contingency planning, analysing tenants, lenders holding finance and government intervention, were all introduced as important factors for the industry to navigate through the next 6-12 months. Read on for full analysis.

Immediate Term - Coping and Contingency Planning as the Crisis Unfolds

In the immediate term, the investment climate for transactions and acquisitions will remain reasonably fair. Most economies are not yet ‘bad’; we are just experiencing some functional problems. Indeed, many trusted that central banks and the government would make this ‘blip’ to the economy as painless as possible. However, as the government is adjusting their reaction to the widespreading of the virus daily, opinions on short-term effects on the markets are following in turn. Therefore, many agreed that new investments were to be eyed cautiously, especially on the opportunistic side and some seemed to favour holding their position while monitoring the uncertainties before moving forward.

On a country level, the virus growth and spread rate is in different stages, making governments and industry leaders cautious, while trying to monitor their neighbouring states, as well as regulations coming in from their company’s countries of origin. The aftermaths on the economic situation will also depend on their country’s main economic drivers, with Portugal, Italy and Spain likely suffering from the effects on tourism and retail. Other countries will be affected by supply chain disruptions from China and other Asian areas.

Focusing on asset classes, especially the hospitality and tourism sector will be in need of immediate contingency planning, such as accelerated renovations of hotels. The short-term effect of the crisis on other asset classes was mostly described in terms of occupiers taking a hit. This could mean non-payment of leases and a more intense scrutiny of tenant profiles to understand possible future cash flow scenarios. Thus, GDP growth for 2020 will be drastically affected, however the sentiment remained optimistic with the hopes that the spread of the virus will normalise within the next four months.

Investment & Lending Appetite - Buy, buy or goodbye finance?

Some attention was spent on the different investor profiles from Asia, Middle East , US and Europe Institutional and Private Investors in terms of risk allocation, whether assets were on hold and if money was still trickling through. As European investors have a big allocation to Real Estate, some suggested there might be a need to reduce portfolios because valuations will further reduce. At the moment, no one saw any signs of any withdrawals from funds, but it was a growing concern as they are closely monitoring valuations.

Much was debated on the tactical and liquidity impacts. Real Estate is still considered a safe haven and as such demand is still here. On the capital market side, it feels prudent and relaxed, however the US has taken a big pause on deals and as banks increase margins - finance will be harder to come by. Prices on the buy side remain positive for most but many disclosed that it was hard to get good assets because asset owners are holding on. Evidence of lenders not lending and becoming tighter on margins was given by a few global asset owners present. US money into Europe especially had frozen and certain refinancing decisions had been put on hold. This might cause a further correction on asset valuations which can be both good and bad.

In short, we cannot get excited about bargains and opportunities just yet, the next 12 months will be about preserving liquidity and holding assets; a worrying trend that could have long term consequences if held for too long. In such an investment freezing environment, people will flee to core, opportunistic deals might struggle to lift back off the ground. From a transactional perspective, projects have been delayed and it is evident people are taking little buy actions.

Global Downturn vs Correction Recession - Crisis vs Opportunity?

Fears of an economic downturn was the main concern amongst the members. Afterall, we are already operating in an ‘end cycle’ environment and Coronavirus might just be the triggering event for a recession, possibly worse.

Banks have lowered interest rates and many speculated what other tricks they are holding up their sleeves such as debt holidays which could be equally positive and negative. Yet even with governments globally reducing monetary rates, this is not a textbook case downturn; it is a sentiment based issue and how the government and lenders react to the uncertainty will become critical before liquidity dries up and impacts both debt and equity real estate.

And yet, even in such a scenario, most remained optimistic. Coronavirus might actually trigger a ‘correction recession’, which many felt had been long overdue for over-inflated asset classes and would spark opportunities for buyers. Such optimism was fuelled by strong liquidity and cash flow still as well as real estate being the number safe haven for money.

One Asset Owner for global core commercial assets bluntly put it that it is unlikely a global recession will spark; ‘(the) end of the cycle is almost always driven by debt and excess liquidity and this ‘blip’ is an exogenous shock like Sars or Brexit. It will impact some business in the short term and marginal decisions but the economy should and can bounce back.’

And of course, there are still uncertainties to account for and challenges to overcome for lenders, investors and assets owners. When compared to the financial crisis of 2008, it was commented that while the current fallout of the virus feels like an exaggeration, it cannot be ignored if the short term disruption gets into the real economy; construction, supply chain and the tourism industry especially we could see 2008 repeat itself. Also, if Italy’s luck spreads to other parts of Europe, likely we will see signs of economic stress and a longer recovery time.

Regions, Asset Classes & Occupier Demand - Winners and Losers

Thinking in terms of assets, hospitality and tourism will feel the worst, followed by retail then offices. residential and logistics, could actually feel some benefit for price corrections. It was speculated that we might also see new industries coming back into Europe.

A minority were worried about rent control and tenant legislation in certain countries to pull out of leases should the situation escalate. Other measures such as shop closures, working from home policies and personal fear impacting daily routines were causing issues for rental income for tenants which is knocking onto the investment and asset owner side of the market. In the long term, rent control and government ‘ tax, rate and rent holidays’ to ease the situation also featured highly amongst the fears.

Everyone was looking at neighbouring markets for benchmarking on how scenarios might unfold, especially on border control and government intervention impacting assets. The majority cited the US as a key one to watch as the ripples outwards were likely to stall finance and global GDP. It was noted that emerging markets might be the slowest to recover both in the short term with the health impacts but also in the long term in terms due to illiquidity and an expected rush to global core safe havens.

In times of contingency planning, some measures members are taking include accelerating renovation plans for hotels to utilise the downtine, different opening hours for shops etc, but everyone was encouraged to analyse deeply the impacts on tenants ability to pay rent. In terms of risks to asset classes, lenders not lending was a main concern especially for illiquid and non core assets, residential was still viewed as countercyclical but refinancing was showing signs of freezing.

Long Term - Will the real estate market fundamentally change?

In summary, it was agreed that the situation is likely to get worse before it gets better and the likelihood of a recession is firmly on the table. There were positives to be seen here, especially to buy assets and generate better returns under a more rational pricing system. A lot depends on how capital markets and banks behave in the short term and what impacts of storing liquidity and freezing finance might have in the long term.

Whilst it was agreed, the immediate effects will peak in three months, there is fear of the long term implications to the global markets and GDP growth. Regardless of the country, people are trying to cope and find solutions and measures to put into place, while money feels like ‘a drip on a hot stone’, the common consensus is to really focus on occupiers- their business and their day to day activities that might impact rent and of course finance sources. ‘Sentiment is as important as reality, getting people to behave in a way not dominated by fear is difficult’, one member remarked. Such reflection echoes the unprecedented uncertainty of what the real estate market and indeed the global economy might look like by the end of 2020 in light of this global phenomenon.