THE COVID EFFECT
A message from our Global Head of Real Estate & Construction
All our personal lives and businesses are affected by COVID-19 in one way or another. Prime efforts focus to preserve the health and safety of people in all walks of life and medical institutions from across the globe are racing to discover and develop cures and vaccines against the virus. Unfortunately, with the virus having spread and become more prevalent across the world in recent months, so too has the social and economic impact.
Governments in many countries are stepping in with a wide range of financial measures (in close cooperation with monetary institutions) to support enterprises and preserve employment. These massive economic and financial stimuli are, however, no guarantee that further economic turmoil will be avoided. Whether it be low or high impact, short term or long term, will depend on how well we can work together to fight and limit the spread of COVID-19.
Real Estate now
The necessary curtailing of social life affects all kinds of businesses, including some directly, such as the leisure industry. Real estate typically reacts slowly to economic changes, however, this unprecedented and abrupt halt to social life and economies has resulted in immediate chain reactions that even Real Estate cannot ignore. For example, the tenant losing its revenue is unable to pay its rent, which in turn means the landlord loses his income and becomes unable to pay his loan, which in turn means the bank fails to meet shareholders’ expectations and financial authorities’ criteria.
It is the immediate cash flow and cash shortage issues suffered by many enterprises that leads to these adverse effects. Governments from around the globe have tended to focus primarily on aiming to sustain employment and provide ‘limited’ relief for other business costs such as rent and employee wages. That could result in opposite chain reactions whereby financers are required to take legal actions against their debtors, the property owners, who are likewise required to pursue legal action against their tenants.
Going forward, keeping a cool head, acting with common sense and maintaining close communication between all parties is imperative at this time. We see good examples of how various parties work together to overcome difficulties in the markets, with cooperative covenants from banks providing relief for debt service to property owners. Retail landlord associations are also rolling out agreements aimed at supporting retailers in despair, providing a range of bespoke solutions, avoiding free rider behaviour / stimulating good behaviour, joined actions to reopen shops a.s.a.p. within safety measures as set by government, and creating liquidity and solvability to survive the corona crisis and create a stronger foothold in the post corona era.
Impacts to the property markets
Commercial real estate may be vulnerable to this crisis, particularly in the short term. A slowdown in property transactions may be expected at midterm as users have other issues than housing on their minds. Investors may become more cautious and await further market developments, focusing on cash, working capital and profitability. Ongoing transactions may relate to pipeline projects or be aimed at core / specific real estate. Financers may become more conservative and less risk adverse, guarding their existing loan portfolio rather than making new funds available to lenders.
These impacts differ per real estate segment, with retail, leisure, travel and hotels being hit hardest, followed by industry and transport. It is sensible to assume that property values in these sectors may decrease over time, should the current impact and knock on effects continue. Housing seems relatively more resilient, but although the peak in many markets may be flattened in the short term, there may be some longer-term price decreases correlating to a rise in unemployment and a decrease in personal income. On the other hand, e-commerce is flying high due to the crisis, stimulating demand for logistic properties.
The impact of COVID-19 on the construction industry seems fairly limited at present, although this may differ in the longer term. Many construction projects have remained open and on course, but also face increased risks of delay due to foreign labourers returning to their home countries or supply chain issues resulting from factory closures or output limitations. There may also be short term cost implications due to a lack of resources and increased safety measures, such as social distancing requirements. On the other hand, building costs have increased substantially in many active economies in the post financial crisis years and may now begin to decrease as the demand for new construction projects lessens. This may uphold maintenance and home improvement, whereas enterprises and consumers may slow down on investment decisions for new construction works.
If not already done so, all companies should be drafting a pandemic exit plan to reopen buildings and construction sites for when the COVID-19 governmental restrictions are lifted. This will likely involve step by step reopening and access for workers and the general public, which will involve team planning and ensuring hygiene & social distancing measures are in place. Indeed, we have seen plans launched for a ‘6 Feet Office’ concept, providing office organisations the option to re-use their business space quickly, safely and within the prescribed social distancing measures. Some of these plans could be adapted for use in alternate property types and although beneficial in some aspects, new distancing measures would imply that much office space cannot be used as effectively as it used to be. On the other hand, office employees have learned and developed new ways of homeworking, saving on travelling time and having more time for their personal family life.
The adoption of more extensive home office practices will likely be a lasting, if not permanent, effect of this crisis. The companies that can adapt to more flexible office working will likely benefit the most, as they realise the importance of reducing costs by offering more homeworking options and downsizing on office space.
None of us will be untouched by the present upheaval in global economic turmoil. No company is recession proof; however, some business models will prove to be more recession resilient. Our industry group will be using this time to talk to, support and assist as many of our clients as possible to help them resolve their issues in the short, medium and long term. This may be directly through our extensive service offering or through connecting them with other clients who have experienced and overcome the same difficulties, converting them into opportunities.
Like any crisis, the present circumstances provide food for thought and invite entrepreneurs to look anew at their business models and seek the best way forward. Taking into account present curtails, exit strategies and key industry trends, this will allow the opportunity to be bold in creating new, innovative and strong companies, fit for the future.
Stay safe, stay healthy.