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What Will Be the Impact of Covid-19 on the Real Estate Industry and on Asset Valuation?

20 de May de 2020

We analyse the effects of the pandemic in the retail, office, hotel and logistics sectors. Will real estate prices drop with the return to normal?

What Will Be the Impact of Covid-19 on the Real Estate Industry and on Asset Valuation?

The Covid-19 pandemic has had a very relevant general impact both in the real estate industry and in the entire economy in general. However, it is still soon to be able to make a correct approach to the scenario that will arise after the health crisis.
Despite this, we can anticipate that one of the strongest impacts will be determined by variations in cash flows in in the future resulting from the change that can occur in people’s income derived from a potential reduction in the employment rate and a CPI rise. All this combined would lead to a decrease in demand that would significantly affect the real estate industry.
On the other hand, in a first instance, we do not see any issues at the time of valuing in a crisis situation. However, it is necessary to point out that the date to carry out the valuation is a key factor, since the information available at that time may lead to changes in value as more certainty about the situation is gained.
In addition, for assets to be valued by comparison, the lack of comparables may pose an added technical problem. Despite this, RICS reports detail market indicators that help us to accurately reflect what can happen in each type of property and with its activity in a reasoned manner. We also use the best assumptions with the information available regarding government announcements and market consensus.
Lastly, it must be added that a massive sale of Investment Fund portfolios, combined with the aforementioned aspects, could result in a significant price fall, but an occasional one and exclusively in the short term.
In this sense, we want to provide some reassurance regarding value in economic activities, since unless the situation at the valuation date allows us to expect a substantial change in consumption habits or in the investment market, the long-term parameters remain somewhat stable. Despite this, the recurrence of valuations would be convenient to inform on the evolution of values more accurately.

What Service Sector Segments (Offices, Hotels, Retail, Logistics) Will Be Most Impacted by the Crisis?

Logistics. In general, the logistics sector is being one of the least affected by the crisis, since investors are committed to it and its prospects are positive. This is due to the fact that this crisis has served to put distribution systems to the test and speed up the penetration of e-commerce in our society.
In this sense, the demand for logistics land has doubled compared to 2019. We will have to analyse whether the health crisis is also driving a certain deglobalisation movement bringing logistics centres closer to the new European production hubs. Despite this, demand for this type of asset will also suffer a setback due to the crisis.
Offices. On the other hand, supply in the office sector is going to remain at levels similar to those before the crisis and, therefore, it is likely to continue below the levels set by demand, which could increase in large urban hubs and be reduced in peripheral areas.
However, it is still soon to determine the specific impact, since aspects such as the possible expansion of the average space per employee, currently set at 8 m², and the definitive introduction of working from home in corporate cultures will have to be considered. These new trends could mean a big change in this market, further boosting the already existing trend of commitment to coworking.
Retail. Unlike others, retail -together with hotel- is being one of the sectors most affected by this context and, in addition, it will be one of the last to return to normal.
The rise of e-commerce and home entertainment, which has been put to the test these days, may have an impact for shopping centres. Investors in this field are in waiting mode and it will be necessary to wait until back to normal to analyse the current demand for spaces to determine their potential returns.
Despite this, during the previous financial downturn, high  street assets maintained stable rent levels and withstood the market stoppage, becoming a safe haven, something that could also be repeated on this occasion, although it is still too soon to assess the impact .
Additionally, a large number of European retailers are assessing their sale strategies, evaluating their needs for commercial space in favour of a greater, or total, commitment to e-commerce.
Hotel. Eventually, the hotel sector is also receiving a great impact from this situation, with a hotel occupancy rates reduction down to 0%, while in early 2020 they had exceeded those obtained in 2019.
It will take more than one year until this sector is back to normal, since the health crisis has not only lead to a stoppage in revenue during these months, but it can also lead to a lack of confidence for tourists -especially foreign ones- for the upcoming high season.
Some estimates predict that the measures implemented in Spain to fight the Covid-19 pandemic could lead to losses of between €70 and €80 billion, which not only affects businessmen and professionals in that sector, but also directly has an impact on the Spain’s GDP, which could have a significant reduction exceeding 5%.

How Do We Work in Such a Volatile Scenario?

The current situation invites us to be cautious in our forecasts. The scenarios we handle depend to a large extent on the duration of the state of alarm, since each new extension can increase the impact suffered, cause a sharper decline in demand and slow down recovery. At Gesvalt, we constantly update our forecasts, monitoring and analysing potential scenarios based on the new measures announced by the government.
Nonetheless, at a general level, we can ensure that there is no lack of rents, since we must take into account the already signed agreements. It must be considered that the impact of the one or two month rent payment forgiveness or renegotiation is very specific and will not have a relevant impact in the long term. With this in mind, our scenarios must be prudent, but based on the potential increases that may take place in the medium or long term rather than on the potential impact in the short term.
It is also relevant to indicate that valuations will require the selection of valid comparables, something that can be complicated for companies and professionals within our industry. 

Will Real Estate Prices Drop with the Return to Normal?

The overall development of prices will depend on the evolution of demand in the different real estate segments. For example, risk premiums indicate that Commercial Real Estate yields will increase in 2020, in contrast with the decline in returns on fixed- income securities and other assets. All this seems to indicate that prices will remain stable, with possible slight downward corrections.
At present, it must be highlighted that large national and international investors’ appetite and availability of capital is still latent, although at the moment they are being cautious and have stopped or postponed the closing of transactions until the end of the state of alarm. With this, the containment measures and advances in medical research that sooner or later must take place may give way to an investment spring provided that the economic deterioration does not turn into a financial downturn, a situation the European Union is working on to avoid.