Kenneth Rouse
Managing Director & Head of Capital Markets BNP Paribas Real Estate Ireland
+353 (0) 1 661 1233
Markets, as we know, don’t like uncertainty, and the real estate sector won’t escape the impact that COVID-19 is now having on the global economy.
This pandemic is affecting workforces, production, travel, gatherings and supply chains and impacting pretty much every facet of daily life. So, inevitably, we know the property market and operators at all levels within it will deal with repercussions.
The big “known unknown” is the scale of the damage, and whether it really is a blip, or more long term? And the other big question is what, if anything, can we do now to prepare?
Stock markets have tumbled and have had some rebound, with the winners and losers in this crisis clearly identified. Question marks are emerging around the liquidity of some corporates. There is also concern about inflationary pressures which may come from the effect of Central Bank intervention on the fixed income market.
This mind-set will no doubt have an impact on property investors and will significantly temper the volume of activity.

 

Solid Fundamentals

But commercial real estate is not like the stock or bond market. It is slower moving and the fundamentals do not fluctuate as dramatically, or as regularly, as those of stock and bond markets. Investors are generally ‘in for the long haul’ and appreciate the durability of property investments.

The notion that, as confidence in stock and bond markets falter, investors move money into hard assets, like real estate, has been mooted as an upside for the sector. Real Estate can provide investors with the one thing they crave – a steady and secure income stream.

With overseas investors accounting for a growing proportion of European property deals, the current temporary reduction in the flow of capital from investors located in the worst hit areas is unquestionably problematic. In recent years, cross border investment in European real estate has grown exponentially, levelling off only in the past year or so, on account of the lower inventory available in prime stock.

Cross border interest and investment in real estate continues to grow in Ireland, largely because of Brexit dislocation in the UK market; London in particular. But, current travel restrictions have seen meetings and deals with investors completely disrupted across Europe of late.

Recovery

As a long-term investment option, real estate is considered better placed to weather isolated shocks to the economy. Ireland’s commercial property market actually rebounded and recovered impressively from the last recession, compared to many sectors.

So what do we need to consider now?

Well, the longer the COVID-19 crisis continues, the more difficult it may become to raise capital, or to borrow or service existing debt. Investors may have to consider whether they need to divest themselves of some real estate assets. If the scale of the pandemic can be contained to one or two quarters, the bounce back should be robust and quick, with defensive assets like prime offices holding up well.

Purchasers may hold off on making investment decisions, in the hope of taking advantage of, or mitigating, any possible future downward repricing.

Health Checks

Landlords are advised to monitor the financial health of their tenants. For example, in the retail, hospitality and leisure sectors, widespread closures and the associated decline in tourism and domestic footfall will impact business performance significantly. Some operators will not recover.

Employers are also in obvious trouble with the country in effective lockdown since March 27th.

In the office sector, a large-scale ‘working from home’ experiment has been unexpectedly triggered and may impact the occupier market in the longer-term.

On the one hand, this may prompt companies to reconsider prior reservations, on account of flexible working arrangements, thereby leading to a decline in the amount of space needed.

On the other, given that, anecdotally, many companies are having connectivity problems with conference calls and network access, and that employees are isolated from their teams and colleagues, it may reinforce the value of the physical office and the benefits of a shared workspace.

With potential for strain on rental commitments, the message is that landlords would be wise to take advice on the terms of insurance contracts and lease agreements. They also need to be prepared to communicate openly with their agents and tenants.

Light at the End of the Tunnel

Similarly, construction industry supply problems and issues around labour may arise in the short term, impacting real estate supply. The good news is that, at present, it appears construction projects are likely to resume as normal from early May, albeit with social distancing measures.

There is light at the end of this tunnel, with markets reopening and domestic economies easing lockdown. Debt markets and financing institutions will be tested in their ability to absorb a temporary shock, and risk assessment and revaluations will be the order of the day.

For now, ‘cash is king’ and, as with every market interruption, there are both challenges and opportunities.

There will undoubtedly be change to the very core of how properties are designed and constructed, how they are financed and occupied even, and which new or existing investors are first back and strongest into the markets. Commercial real estate, like so many sectors just now, is in unchartered territory as regards the ultimate impact of this pandemic.

But, the constants that market operators can rely on are the underlying strength of property, firstly, and the value of experienced advisors with global expertise and resource.

Kenneth Rouse
Managing Director & Head of Capital Markets BNP Paribas Real Estate Ireland
+353 (0) 1 661 1233