Real estate after COVID-19: uncertainty, investment on stand by and recovery in the medium term

The real estate market is taking a hit in the midst of the health and economic crisis that is affecting everyone, but the outlook is optimistic

Photo by Sean Pollock on Unsplash
Photo by Sean Pollock on Unsplash
2 April 2020, Redaction

The real estate business is taking a bit from the health and economic crisis that is affecting the whole world. The COVID-19 pandemic has left the signing of many real estate operations in the air, has paralysed the market for offices and retail and has relaxed the day to day running of investment funds that were considering new purchases in the country. Now, the whole sector is wondering what will happen after the state of alarm and how the coronavirus crisis will affect the Spanish real estate market. Idealista/news has spoken with the main consulting firms and players in the real estate business in the country about the future in the short and medium term of the business, where they expect that investment will be paralysed for a few months and the uncertainty will make the recovery expected in the medium term.

"We must bear in mind that before the COVID-19 outbreak arrived in Spain, our country was going through a good moment in terms of the economy and real estate. This fact is of enormous importance since basic real estate, formed by hiring, the rate of availability and the evolution of income, were factors that were healthy. This leads us to think that until the situation becomes normal, investment activity will be waiting for a market reactivation. Today, investors should have no reason to abandon their plans prior to this crisis," explains Anna Gener, CEO of Savills Aguirre Newman's Barcelona office.

"Previous experiences of other crises have taught us many things, and perhaps the most relevant and common lesson is that once the most critical moments are over, the sector's recovery has always been very intense, even greater than expected.  With the volatility we are experiencing in the financial markets and with low interest rates, we believe that the positioning of the real estate sector as an investment should be strengthened after this period", adds the director.

CBRE, for its part, is less optimistic. The consultancy firm anticipates that COVID-19 will have a negative effect in the short and medium term on the real estate market in Europe, provided that the outbreak is brought under control within a reasonable period of time.

"Initially, restrictions on travel and the movement of goods between Europe and China were the main concern because of the impact on supply chains and tourism. With the virus intensifying its spread in many parts of Europe, governments and businesses are taking steps to limit social interactions. Allowing only essential travel and encouraging remote working has become the norm in the corporate environment. European governments have tightened borders to contain the spread of the virus and the United States has implemented an entry ban on European travelers," they say.

However, the consultant also sheds some light in the darkness. "The accommodative approach of the European Central Bank's (ECB) and other central banks' monetary policy suggests that the low interest rate environment is likely to continue for longer. In addition, many governments have activated further fiscal easing. The combination of the two should support many economies through what could otherwise be a much stronger blow to economic growth.

Another of the world's leading consulting firms, Cushman&Wakefield, explains that "right now everything is uncertain and this is the first time we are facing a health crisis of this magnitude. The trends in Asia-Pacific give us a precedent for hope in terms of recovery in the sector, but even in China, daily life is not what it used to be, making it more difficult to measure the impact it will eventually have on real estate," they explain.

"Economic growth forecasts are being revised downwards and the risk of a global recession is very high. This will have an impact on property feedback, emphasising the crisis that hotels and retail will experience, which are the ones that will see the biggest setback in their business. However, the industrial and logistics business will show greater resistance to this crisis," Cushman & Wakefield explain.

For the consulting firm, having passed a global economic crisis relatively recently has helped governments and central banks "know how to act in the face of uncertainty and they are moving quickly to implement measures to combat this economic situation.

For Ramon Riera, president of FIABCI Spain and Europe, this crisis "is a forced stop that harms our sector, but I am convinced that the coronavirus will pass and the recovery will be quick for the real estate. It is time to wait for decisions that do not depend on us". Riera refers to the measures taken by public administrations, as well as the financial sector, "which are much more proactive than in 2008 to get out of this health emergency without a major negative impact on the Spanish economy.

In this sense, Riera also compares this crisis with that of 2008 and highlights its "many differences". "This exceptional situation has nothing to do with the crisis of 2008: back then, nobody cared about us, the real estate agents, or the SMEs. At that time, obtaining financing was an almost impossible mission; a completely different situation compared to the present one, in which the only thing we have suffered is a temporary halt in our activity", says the president.

Likewise, Riera also wanted to emphasise the positive side of this situation: "We real estate professionals are taking advantage of the confinement to train ourselves and update our portfolios, strengthen relationships with clients within what is possible and it is serving us to help us turn to technological innovation". Riera predicts that "when the confinement is over, there will be fewer meetings outside the offices, less travel and the activity will be more focused on conference calls and video calls; and this will allow us to have more time for ourselves and meet the much demanded and necessary family time".

Real estate agencies are optimistic

The main real estate companies have taken advantage of the health crisis to plan how they will deal with the coming months after the stoppage. According to Alexander Vaughan, founder of Lucas Fox, "the impact of the coronavirus will depend on the length of the quarantine and the limitation of movement of international buyers". "However, we expect the impact on the medium and high segment of the real estate market to be short to medium term. Due to the fall in the financial markets and the unprecedented drop in interest rates, we are convinced that the real estate sector will continue to be one of the most interesting assets for investors," he says.

For Thibault de Saint-Vincent, president of the Barnes real estate group, which specialises in luxury products, "the situation is absolutely exceptional. Our activity has decreased by about 60%, but it is not completely paralysed, as there is still much we can work on to continue offering solutions to our clients," the statement reads.

"For the moment, it is very difficult to know how this crisis will evolve economically, but it seems likely that investors will seek to protect their assets by focusing on safe securities such as luxury real estate or gold. If the recovery takes place at the beginning of May, the market should continue at the same point it was before this crisis. But if the state of alarm lasts longer it will be a different story. Everything will depend on the scale and duration of this health crisis," he adds.

Juan-Galo Macià, CEO of Engel & Völkers in Spain, Portugal and Andorra, is considering three possible post-crisis scenarios for the coronavirus in Spain. "One is optimistic, with a drop in sales prices below 10%, which could reach 9% in Spain, with a 12% drop in transactions; a neutral scenario, with a drop in price of 11.5% and transactions of 16%, and a pessimistic one, where the drop in sales amount is 14% and the drop in transactions is 20%".

In any of the scenarios, it should be noted that the behaviour will be very different between the first and second semesters, where the last two quarters will be much better than the first and second. Furthermore, we forecast that the recovery will continue in 2021, as the economy will grow by over 3.5% and the residential market will once again enter a phase of expansion.

Mikel Echavarren, CEO of Colliers Spain, also remains optimistic and believes that the real estate market will continue to channel liquidity globally. "The world will have learned the painful lesson that in such complex circumstances, although solidarity is at its best, the importance of having one's own resources to withstand complicated situations will be greater than ever. This will mean that savings rates in the medium and long term will increase compared to the 24% average of recent years at a global level and that the creation of personal assets and a pension fund will be more important than ever. All of this will increase the levels of global liquidity allocated in a very relevant percentage to real estate investment in leased assets", he points out.

In his opinion, institutional investment will focus more than ever in the next decade on the real estate sector, a refuge market in the face of sudden fluctuations in pandemics or major crises.

Another relevant factor that will become evident after the crisis is the risk of public intervention on private businesses and on private investments. This will lead, in Echavarren's opinion, to real estate investment being increasingly channelled through diversified investment funds with a lower risk of intervention by populist governments.

For the expert, the winning sectors of this crisis will be the rental housing sector, the logistics sector, and offices. Investment in hotel assets will continue to be a safe investment in the long term, although it will be damaged in the short term by its vulnerability to health crises.

A new scenario

The health crisis will not only leave an uncertain business scenario, but also a paradigm shift in the way real estate assets held by large groups are used. According to Jorge Sena, director of commercial assets of Knight Frank, "some changes will be transitory, but in other cases will mark a new market. In my opinion, and although it is preliminary as we do not know for sure the extent that this situation will have, the trends we are beginning to see impact the business of offices, retail, logistics and residential projects".

As for the office business, the Knight Frank expert stresses that "teleworking is an appropriate solution when you're out of the office. The companies that were ready have confirmed it and those that were not, got in tune quickly, facing the risk of losing the only way to keep the business alive".

"It is too early to venture into the behaviour of revenues and demand when markets may return to normal. Teleworking will take a step forward as a cultural change, but only for particular situations. Offices will continue to be a very defensive asset, although there will probably also be an advance in contract conditions. Little by little, flexibility in the duration of contracts will be imposed, and I think we will be able to see some of the buildings dedicated to these shorter-term contracts, a lesson learned from coworkers.

Of the four businesses in which real estate in Spain is articulated, Sena also highlights the residential, and specifically the rental sector. "In this crisis we are seeing encouraging news from the large professional owners of rental housing. The private institutional housing market is reacting by offering flexibility in the face of a potential negative impact on employment and income for tenants. For example, both Blackstone and Lazora have launched campaigns to make rent payments more flexible due to extraordinary situations, without any regulation. This shows that beyond the debate on asset ownership, professional management allows for a more efficient response since private owners do not have that capacity. The management of large holders is an unstoppable trend that will be even more solid after this crisis," he says.

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