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The COVID-19 crisis: will commercial real estate resist the shock?
As one would expect, the health crisis and lockdown measures had an immediate impact on the real estate market and investment decisions worldwide: variation in transaction volumes, the impact of support measures, and much more. What is the outlook for commercial real estate in the short and medium terms? Is the sector optimistic? Richard Malle, Head of Research at BNP Paribas Real Estate, sheds some light on the issue.
What was the sector's immediate reaction to the announcement of the health crisis and the implementation of restrictions?
The market never stopped. It has continued, on lockdown of course, as interactions between the sector's key players persist on a global scale. All in all, the market slowed down significantly, but it was never frozen by the lockdown. Ongoing negotiations have continued and new sales or acquisition projects have even emerged. The volume of transactions fell automatically as a result of the lockdown measures and wait-and-see behavior. However, and this should be emphasized, a fall in trading volumes does not automatically lead to a decline in values, which are by nature more resilient.
Have investors changed their strategy?
Investors do not all have the same strategy: some favor a cautious, wait-and-see attitude, without calling into question the appeal of real estate; others see this as an opportunity to acquire more properties in a less competitive environment. International trade also continues, even if the key players tend, as in every crisis, to retreat somewhat to their domestic markets. In addition, there is still considerable liquidity to be invested in the real estate markets, which provides very strong support for demand, even in times that are more uncertain.
So, there has been no impact on prices?
Institutional investors base their decisions less on the price per square meter than on real estate yield, which is established in return for a risk on the asset, such as its location, rental condition or the quality of the building.
Also, the return on commercial real estate is comparable to that of bonds, in a long-term investment perspective that is relatively secure and not very volatile. Today, however, financial rates are very low, benefiting from very positive real estate yields, which are much higher than government bonds. Real estate investments therefore benefit from a risk premium in their favor, even in this uncertain context. For the most sought-after properties, prices could therefore be impacted very little, despite this exceptional situation. On the other hand, for properties with defects that were insufficiently reflected in yields and valuations before the crisis, more significant value adjustments may be seen.
International trade continues, even if the key players tend, as in every crisis, to retreat somewhat to their domestic markets.
there any disparities in the use of these assets?
This is one of the questions addressed by the Commercial Real Estate Outlook Report we published in April. As far as offices are concerned, the premium office market in central business districts is maintaining healthy fundamentals and holding up rather well, with supply levels expected to remain low in most European urban areas. Properties in other, more peripheral sectors or those with rental vacancies may experience more pronounced adjustments. The crisis may therefore allow for a return to a more hierarchical asset value, whereas in recent years asset values have tended to become more homogeneous. From a global perspective, investors are focusing on ideally located assets, with reputable tenants who are able to withstand the crisis. This logic will be amplified in the coming quarters given the uncertainty surrounding the health and economic situation. However, this is a trend that has been underway for several years. Therefore, here we can’t call it a market upheaval.
Is the sector susceptible to the measures taken by governments?
Of course, investors are very attentive to the economic situation and the management of the crisis by governments and central banks. These measures help and strengthen their ability to look ahead and assess the economy correctly, in the dynamics of the tertiary user market, and therefore in the proper valuation of their assets. It is thus a key element in the analysis of real estate markets.
The (commercial real estate) market never stopped.
How do real estate investors view the duration and depth of the crisis?
Overall, investors agree with most observers that the economic crisis will be very deep in the spring of 2020 in major European countries. Debates focus on the time and intensity of the expected recovery. The central scenario remains that of a strong recession in the first half of 2020 and a recovery in the second half of the year. The latter will depend on two main factors: on the one hand, the end of lockdown, lifting restrictions and control of the virus; and on the other hand, measures to support the economy and the morale of market players. In any case, real estate is supported by sufficiently sound fundamentals in most markets to show healthy resilience during this unprecedented cycle.
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