A number of major global economies have launched initial monetary and fiscal stimuli packages in response to COVID-19 to contain the negative economic growth.
In Europe, a number of EU28 countries have shut borders and the European Central Bank (ECB) has responded by announcing a €750bn government bond acquisition programme in addition to its €120bn asset purchase programme to stimulate domestic demand. Reuters data indicates that Germany has agreed to a €750bn fiscal package, whilst the French government has guaranteed up to €300bn of corporate borrowing. Similarly, the Bank of England (BoE) has responded by cutting interest rates from 0.25% to 0.1% and will subsequently increase government bond acquisitions. In Poland, the Monetary Policy Council reduced the interest rates twice, including a reference rate cut to 0.5% (from 1.5%) – the lowest level in history.
A number of Europe’s governments have introduced commercial tenant protection measures, including business rates/property tax suspensions, and safeguarding from eviction for a circa three-month period. Tenants and landlords are increasingly working together to find short-term solutions, including suspending service charge payments and reducing concierge services for buildings in operation.
The Covid-19 pandemic is and will affect the real estate market as well. The scale of the impact is still to be assessed; however it may differ between sectors.
Going into 2020, average European office vacancy rates stood at 5.4%, the lowest rate on record, with core markets including Paris and Berlin hovering just above 1%. We initially factored in more development commitments for the year, and tenants are forced to sign lease extensions due to a shortage of alternatives.
As Q1 2020 data is being revealed across Europe, so far the pandemic has had a relatively benign effect on the commercial real estate markets and the consequences of all the changes currently observed are yet to be seen in the next quarters.
The deliveries of materials to construction sites are being delayed due to labour and mobility issues. It is therefore very likely that, in the case of a continuing emergency situation, some of the projects currently under construction will be available on the market later than originally planned. Likewise, some developers are likely to take stock of the current situation before committing to new schemes, thus the start of new projects may as well be postponed.
On the demand side, in the case of the prolonged pandemic situation, some shifts may also occur. Tenants may start postponing decisions regarding renting space, where possible. This may cause a visible slowdown in demand, at least short-term, which ultimately may result in the increase of the vacancy rate.
A number of factors at play are influencing the demand for workspace as the office sector has been put through an unexpected test no-one could have predicted. Technology including Microsoft Teams and Zoom have facilitated workers to work from home more easily and enabled companies to adopt agile working strategies. As workers become more aware of the technology on offer, we expect the workplace to adapt to encourage more collaboration. However, increased home distractions, intermittent internet access and the provision of a suitable home-working environment are likely to maintain existing demand levels.
Investment transaction volumes will recede over the course of the year, particularly as a shortage of openly marketed stock remains, and the bidding process is less competitive than previously.
PropertyEU reported that a number of European retail parks and shopping mall sales have been withdrawn or postponed, although Kotva department store in Prague was acquired by Generali Real Estate and Sekeyra Group. A number of office and logistics transactions have also changed hands, with strong demand for multifamily. Bans on travel and self-isolation guidance is making inspecting assets and conducting technical due diligence more difficult in the short term, as virtual tours will become increasingly important.
During times of increased uncertainty, investors have shifted acquisition focus towards core product in core markets with secure income streams, which we expect to be the case over the course of 2020. Landlords are likely to take stock of existing portfolios as funds remain cash rich, but more sensitive to pricing. There are no signs of distressed selling yet, although the marketing process of some assets is expected to be delayed into the second half of the year when the bidding process will resume its usual competitiveness.
The crisis is likely to lead to declining transaction volumes in all areas, but the extent is likely to vary, the sharpest decline in transaction volumes will be most likely in retail, followed by office properties. The smallest impact is expected for logistics, and multifamily properties.