Corona Crisis 2020 and 2021: Closed schools, not only parents in the home office and countless question marks about what the future holds. At least as far as the real estate market is concerned, we're trying to help.
Mid-March 2020: Home office had been in place for a few days, stores and schools remained closed. The shock was deep-seated, as was the conviction that everything would be back to "normal" in a few weeks, or at most months. Under enormous uncertainty, 10 division managers had dared to take a look into the future for their segment. Now, hand on heart: Have the forecasts come true? And what are their current assessments?
In this blog article we have compiled outlooks on the following topics:
- Economy & labour market
- Logistics & industry
- Hotel & leisure
For those interested: the complete statements from March 2020.
1. Economy & Labour Market
Martin Steininger, Chief Economist at bulwiengesa, steininger [at] bulwiengesa.de:
"Disappointed expectations of the forecasts are often also caused by extraneous claims. By their very nature, all forecasts can only be conditional forecasts. Thus, important influencing variables such as interest rates are set as so-called technical assumptions. The projections for the entire forecast period are then based, for example, on the extrapolation of average values of the last few months or current values. It inevitably follows that if these 'set' variables change drastically, even a technically accurate forecast can sometimes miss the actual result by a considerable margin. Forecasts as conditional forecasts are always to be understood and assessed only in the context of their assumptions.
So far, so good: Have our forecasts and the assumptions made about the economy and the labour market achieved their ambitious goals? Yes, they did: our approach of modelling business surveys as a basis for statements on individual economic sectors over the period of the pandemic proved more promising than alternative methods in 2020. The modelling of how much which economic sectors reduce their activity over which period of time and how quickly the return to normal economic activity occurs after the 'exit' from the general baseline restrictions can be adjusted promptly to the policy requirements - in 2020, but also now, in 2021.
The outlook for the German economy will continue to be shaped by the Covid 19 pandemic. From summer 2020 onwards, the domestic economy - thanks to robust industry - made up for much of the previous loss of activity. For the winter half-year 2020/2021, however, a limited setback in economic activity must be assumed as a result of the renewed pandemic. Thereafter, however, the German economy should grow again.
In the scenario we consider most likely, real gross domestic product (GDP) in calendar-adjusted terms rises strongly in the following two years at rates of 3.9% and 2.7% after a decline of 5.3% in 2020. In 2023, the GDP increase will then approach that of potential growth. The pre-crisis level will be reached again by the end of 2022 at the latest and potential output only a little later. Consumption opportunities that were previously closed due to the pandemic will gradually be reopened and exploited, and the currently very high savings rate will fall sharply as a result. The recovery will therefore be driven primarily by private consumption. In this context, it should be mentioned that, according to our estimates, the Corona crisis caused the savings rate to rise to a record level of more than 16% in 2020 - enough leeway to allow future consumption and leisure desires to strengthen after the vaccination.
Despite an increase of 430,000 more unemployed than in 2019 (rate: 5.9 %), the labour market is considered robust in the past year and also in 2021: In analogy to the financial and economic crisis of 2008/2009, various channels compensate for the spread of negative economic consequences. Only a small share is compensated by job cuts, companies try to keep their core workforce as far as possible. The share of self-employed and mini-jobs, on the other hand, is likely to be disproportionately high. Here the pandemic will leave its mark on the domestic labour market; these employment groups are particularly affected by the impact of the lockdown. A noticeable relief on the labour market is not expected until 2022. The unemployment rate will remain at 5.8% in 2021, to a large extent also dependent on the pandemic-related supply of subsidies or participation of persons in active labour promotion measures.
Last but not least: The financing conditions remain extremely favourable in 2021 - in the medium term, the risk of a paradigm shift in monetary policy arises here. The lavish state aid is currently increasing not only government debt, but also the debt of companies that take out emergency loans. Warnings of a zombie economy or higher inflation should therefore not be disregarded."
André Adami, Head of Residential Division at bulwiengesa, adami [at] bulwiengesa.de:
"In spring 2020, we assumed that the impact of the Corona pandemic on residential investments and residential project developments would be comparatively low compared to other asset classes. And that for security-oriented investors such as pension funds and insurance companies, the sustainable stability of residential real estate would become even more important, and that long-term investors would additionally benefit from the even further decline in financing interest rates. We expected significant declines in new rentals and sales, but not a decline in importance for residential. On the contrary - the Corona crisis would make family and one's own four walls more important again than the weekend trip to Milan.
Some nine months later, these assessments have been confirmed. Institutional investors are buying strongly again after a few scare months and are able to collect new capital. Prices on the investment market are stable as interest rates remain low.
While new construction rents tend to move sideways, purchase prices continue to rise, driven by low supply, low financing costs and increased appreciation of housing. However, fewer transactions took place due to the lockdown.
Major disruptions on construction sites could not be detected, although foreign workers or subcontractors were partly absent. The construction industry is suffering somewhat, however, as processes in the administrations and approval procedures take significantly longer in some cases, also due to the lack of limited existing digitalisation.
For the next 24 months, two trends will determine the housing industry more than in previous years: In view of the current presence of the topic 'health', care and senior citizens' properties have become even more of a focus for real estate investors than before and will play a greater role in project developments. Furthermore, the suburbs and second-tier cities around the metropolises are becoming increasingly important for housing developments as the appreciation of gardens and high quality living continues to rise. As home offices continue to establish themselves in the long term, longer commutes will be accepted if the office in the city only has to be visited on two or three days.
Prices for owner-occupied homes and land will therefore rise at an above-average rate, especially in the outskirts of cities, while flat prices and especially rents will continue to grow at a lower level than in previous years."
Felix Embacher, Head of Research Division at bulwiengesa, embacher [at] bulwiengesa.de:
"In March 2020, we formulated the thesis that the micro-living segment could be affected by the Corona Crisis if our social interaction and global networking were to change permanently. In student housing, we identified the risk that travel restrictions could lead to a decline in demand from international students. In general, we were somewhat more pessimistic for the serviced flat segment than for student housing, as declines in demand here have a much quicker impact on occupancy and thus turnover than with student flats, where the rental contracts are valid for at least six months, due to the fact that they can usually be rented on a daily or at least monthly basis.
Despite the Corona crisis, the number of students in the winter semester 2020/21 increased by 2.0 % compared to the previous year, while the number of first-year students fell by 4.0 %. Occupancy in the micro-living segment has decreased by three percentage points to 90% in July 2020 compared to January 2020. Rents have also declined by 6 %.
This is not a slump, but a dip that the segment, which is used to success, is now experiencing for the first time. On the investment market, interest in residential apartment buildings remains high, as surveys show. The situation with serviced flats is significantly different and, above all, more heterogeneous. Here, the occupancy rate has declined significantly, especially in the aparthotels, as it has in the hotels, and in many buildings it is probably far below a threshold that is necessary for business management. In boarding houses with longer-term stays, on the other hand, occupancy is usually much more positive. Nevertheless, investor interest in this asset class is more restrained in the current market phase.
In the student accommodation segment, Germany could not only maintain its very high level of attractiveness in the medium to long term - according to Study.EU, Germany was already the most attractive country for students in Europe in 2018 - but could even expand it further. This is because in the second most popular country, the UK, universities will be charging EU citizens so-called 'international' fees from the academic year 2021/22. This will make studying there significantly more expensive. If many international students then switch to studying in Germany, the demand for student accommodation will increase in this country.
In the serviced flat segment, demand will pick up as soon as business travel returns to more or less normal levels. We expect a return to business-as-pre-covid from 2022 onwards."
Sven Carstensen, Member of the Board at bulwiengesa, carstensen [at] bulwiengesa.de:
"The year 2020 was characterised by the discussion about the future of the office market against the background of the growing importance of home office on the one hand and new office concepts on the other. Expectations ranged from a strong disruptive influence - and thus a decline in the demand for office space - to higher demand due to less dense workplaces. This discussion continues to dominate the market, except that in the meantime a certain objectification seems to have set in and the connection between overall economic prosperity and office market performance is being taken into account more strongly again.
As expected, take-up fell sharply last year - this reflects the crisis-related aversion of companies to long-term location decisions. The average take-up per A-city thus fell by 37% compared to the previous year. Considering the extent of the crisis and the two-time lockdown, this decline can nevertheless be described as moderate. As already forecast in spring 2020, a massive increase in vacancies has so far failed to materialise. Although the market cooling is reflected in an increase in the vacancy rate by 50 bp, the current value of 3.4% on average for the A-cities does not (yet) indicate a crisis-like development.
At an early stage, bulwiengesa pointed to increasing difficulties in the realisation of planned office projects due to more restrictive lending by banks - a trend that has stabilised over the course of the year. As a result, fewer speculative projects (i.e. projects without relevant pre-letting) will come onto the market. The risk of an overproduction of supply space is thus significantly reduced.
So how accurate were we in our spring forecast last year? The current point in time is still clearly too early for a solid assessment. From the current perspective, however, it can be stated:
- If the economic recovery begins noticeably in the middle of the year, as we continue to expect, this will have a stabilising effect and stimulate demand for office space.
- Home office will have an influence on office demand, which is also reflected in new office space concepts. We still do not expect a collapse in demand initiated by this.
- Particularly in secondary locations, there will be rent and value adjustments - here, too, the expectations from the previous year have not changed.
- As in the previous year, the investment market will be characterised by strong demand for core properties, so prime yields will remain stable.
There is therefore currently no reason to deviate from the fundamental trend statements of the Spring Forecast 2020. The need for permanent market monitoring remains very high against the backdrop of a market environment still characterised by uncertainties."
Dr. Joseph Frechen, Head of Retail Division at bulwiengesa, frechen [at] bulwiengesa.de:
"The brick-and-mortar retail sector is not resting. The first lockdown in spring 2020 already left deep scars, and now the second hard lockdown has been going on since December. Our assessments expressed in April 2020 have unfortunately come true. Many affected stationary retail businesses, we wrote, would stop or reduce their rent payments. And also that settlements were pending between landlords and tenants to reduce rent demands and permanent rent reductions in the 'normal phase'.
The time since April 2020 has been used by many owners and asset managers for tenant talks. In many cases they agreed that no rent would be paid for the months of closure, but in return an extension of the lease term was agreed; partly on the basis of old, but also at reduced rental conditions. These talks dragged on into the autumn, especially with tenants from the fashion retail sector. No sooner had these agreements been fixed and the sales hopes of the stationary fashion retail trade returned, than the soft lockdown in November and subsequent hard lockdown in the all-important Christmas business caused a strong downturn.
This is precisely the mood that characterises stationary retail at the beginning of the year. But the retail picture is complex. While the stationary retail trade tends to suffer - with clothing and shoe retail being the biggest sufferer here with -23.4 % compared to the previous year, while food retailing is up by 5.8 % - internet retailing hurries from record to record and increased by 24.1 % compared to the previous year. Accordingly, the Federal Statistical Office reports an increase in retail sales in 2020 of 3.9 % compared to the previous year (data in real terms, provisional).
The start into 2021 is more than bumpy for the majority of the stationary retail trade. Click & Collect is developing as a survival aid for some, mostly owner-operated retail shops and is evidence of the enormous creativity, activity and performance of the stationary retail trade. But these diverse activities should not obscure the fact that rents in stationary retail remain under pressure for suppliers of goods for aperiodic needs. High-street locations are no more spared from this than shopping centre locations. Nevertheless, it is becoming apparent that the best city centre locations and shopping centres will survive this development more robustly than location areas and centres that already showed signs of a declining willingness to pay rents before Corona. As already discussed in the spring of 2020, the Corona pandemic shows us the painful adjustment process in some sectors of the stationary retail trade at high speed. Nevertheless, we consumers are increasingly recognising what bricks-and-mortar retail provides and what we would miss if it disappeared: intensive interaction, sparkling eyes, entertaining conversations, sociability, pleasure, leisure and distraction. This is where bricks-and-mortar retail, especially the currently hard-hit fashion retail, will be able to start again and play to its strengths, also in comparison to online retail. It is still far too early for a swan song for the stationary retail trade, even if 2021 will probably demand a lot from it.
6. Logistics & Industry
Patrik Völtz, Consultant Logistics & Industry at bulwiengesa, voeltz [at] bulwiengesa.de:
"When the Corona pandemic spread in March 2020, uncertainty was high in the markets. There also seemed to be some uncertainty in the logistics real estate sector. Supply chain disruptions were the predominant problem; ocean freight, for example, was not prepared for these challenges. However, we assumed that these challenges would have little negative impact on the logistics real estate industry in the short and medium term, since, among other things, leases are usually concluded for the long term. A declining demand for warehouse space in some logistics sectors was also forecast. On the project developer and investor side, uncertainty was high at the time and a wait-and-see attitude seemed extremely realistic.
In the course of last year it became apparent that we were mostly correct with our forecasts. With regard to logistics real estate, the confidence was well-founded, because the systemic relevance of the logistics industry is still obvious. Major challenges had to be mastered in the process of logistics operations. The production facilities, mainly located in China, were able to resume operations after a short time, with the downstream freight routes to Europe and North America representing the bottleneck. In the meantime, however, the supply chains are functioning at a good level again. The initial reticence of many players turned into optimism again in the second half of 2020 and at the beginning of 2021. Project developers are aware of the continuing high demand for logistics space; in 2020, several large funds have been launched that specifically define logistics real estate as an investment target.
Where do things go from here? Much will depend on the extent to which mutations of the virus spread in the future. The macroeconomic consequences are difficult to assess from today's perspective. However, the following conclusions can be drawn for the logistics real estate industry: It is highly likely that demand for e-commerce solutions will continue to rise. Global supply chains have been able to learn from the experiences of the previous year and appear to be at least to some degree more stable in the future than they were at the beginning of 2020. Increasing demand for logistics space will lead to rising prices for land and rents, whereas yields will continue to fall. The pace at which these developments will take place and when stagnation will be in sight is uncertain. In all likelihood, 2021 will not yet show a reversal here."
7. Hotel & Leisure
Dierk Freitag, Head of Hotel- und Freizeitimmobilien bei bulwiengesa, freitag [at] bulwiengesa.de:
"Our fears of March last year have been more than confirmed. As is well known, the situation of the hospitality industry, leisure and culture has not only deteriorated in the past ten months, but has developed dramatically. At the end of 2020, the demand for overnight stays in the German accommodation sector was about 40 % below the previous year. No worse result has been achieved in the last 30 years.
Hotels, leisure and privately or club-run cultural enterprises are economically at rock bottom. Where possible, project developments have been stopped. The first operators gave up and various investors are refraining from hotel and leisure investments. Hotels in major German cities, whose economic mainstay is usually business tourism, are particularly affected. One of the few rays of hope is the holiday hotel industry, which profited from the travel restrictions abroad after the first lockdown and achieved comparatively good occupancy rates in the high summer of 2020 - which, however, should by no means be called winners of the crisis.
The liquidity reserves of almost all players have been exhausted, which is why lease payments have been stopped or drastically reduced in some cases. This in turn raises problems on the landlord side, as property owners also have to meet their payment obligations. And value corrections are not absent.
The economic losses in many sectors and the good experiences of many companies with video conferencing lead to fears that the business-motivated MICE demand from home and abroad, which is important for the city hotel industry, will remain below pre-crisis levels for at least two to three years, if not longer. And a recovery in visitor flows does not mean economic recovery for tourism businesses, which need capital right now for concept modifications, digitalisation, staff retention, debt reduction and debt service.
For cinemas, fitness centres & Co. the outlook is similarly bleak. Especially if the cocooning currently prescribed by the authorities should become a habit. After all, some people may have discovered that spinning, asanas and watching blockbusters - like shopping - can also be done from the comfort of their own homes.
The holiday hotel industry will recover more quickly. But there, too, caution is called for in terms of investment. When foreign countries can be visited again without restrictions, foreign holiday resorts will make every effort to lure German tourists into the country. Moreover, in the next few years we can expect a high increase in supply, especially near the coast.
The full extent of the crisis will only become visible in a few months, when the insolvency application process resumes. And then the warmer season begins, which is a low occupancy period per se for cinemas, gyms and many a city hotel."
Dr. Heike Piasecki, Head of Housing/Senior Living at bulwiengesa, piasecki [at] bulwiengesa.de:
"At the beginning of 2020, it was said: 'Concern is growing in the homes ...' and it was pointed out that impairments will increase considerably. Burdens not only in terms of the care and maintenance of the health of the residents, but also in organisational and economic terms of the facilities.
And unfortunately, things have become much more drastic and the concern has turned into higher mortality among residents, many restrictions for those in need of care and their relatives, a greatly increasing workload for the employees and an impact on the economic efficiency of the care facilities.
Meanwhile, there are visiting concepts, the use of rapid tests and other measures to restore the urgently needed social contact between residents and their relatives. The Covid 19 vaccinations of nursing home residents and care staff that are currently underway will help to increase the protection of residents in the medium to long term and to curb the higher mortality rate again.
A survey of healthcare property operators conducted by the Bank für Sozialwirtschaft in the summer confirmed the fears assumed in spring 2020: uncompensated revenue losses due to occupancy declines and cost increases are in the majority between 5% and 20% of turnover; the refinancing gap has increased and further liquidity shortages are expected in the course of the pandemic.
Parts of the losses are covered by the 'COVID-19 Hospital Relief Act'. However, this does not cover the investment costs of the facilities. Therefore, it must be in the interest of the property owners as well as the operators to find joint solutions that secure the tenancy and thus the operation of the facility in the long term. Insolvencies of small operators cannot be ruled out in the medium term.
Demand for real estate investments that are not dependent on the economy has increased significantly despite the recessionary economic phase. Investors consider the sustainable cash flow generated in senior citizens' properties to be particularly positive. This is also reflected in the current transaction activity. According to an analysis by CBRE, the transaction volume in 2020 amounted to 3.38 billion euros, a record result. Nursing homes were able to significantly expand their market share to 72 %. The share of the now established assisted living asset class also rose to 14 %.
Due to the increasing investor demand, the scarce product and the short- and long-term reliable cash flows, the prime yields of nursing homes have continued to fall during the pandemic and are hovering around 4 %. It is expected for 2021 that the investment volume in care properties will only be limited by the product supply given the high investor demand."
Marcus Badmann, Managing Director of bulwiengesa appraisal GmbH, badmann [at] bulwiengesa-appraisal.de:
"In March 2020, we assumed that the individual market segments would be affected to varying degrees in the short and longer term and that there would not be a massive collapse in purchase prices, but rather a reduction in the number of transactions. Furthermore, we assumed that rental and purchase demand would not uniformly return to pre-crisis levels. It was also unclear to what extent the various market participants would be affected by the crisis and to what extent transactions that had not taken place would be made up for. That the persistently low interest rates will have a positive effect on the real estate market in the longer term was also part of our forecast, as well as the expectation that real estate investments will be seen as a 'safe haven', as long as they do not concern directly affected types of real estate such as hotels and shopping centres.
We had great confidence in the German real estate market at the beginning of the pandemic and assumed a pronounced resilience. Nevertheless, we are surprised at how pronounced this resilience is. Our forecast from March 2020 has largely come true: Transaction volumes have declined significantly in most property types, but prices have remained largely stable. It was to be expected that properties coming onto the market during the Corona pandemic would be among the safe investment opportunities and would not fall in price, or not significantly. Properties where tough price negotiations are to be expected, on the other hand, are preferably not offered. The fact that in some property types the price dynamics have even continued, possibly somewhat moderated compared to previous years, is an impressive sign of investor confidence. Unfortunately, the property types that were only able to generate lower sales due to the lockdowns, such as hotels and non-food retail, have been strongly negatively affected.
The whole truth will become clear once the immediate pandemic situation is over and government relief measures expire. During 2021, more pronounced effects will be seen in the real estate market. In hotels, we expect increasing sales of distressed properties as occupancy will only gradually increase. Retail for aperiodic needs will have permanently lost a share to online retail, which will lead to increased vacancies, declining rents and falling purchase prices. Housing and especially logistics will increasingly be among the beneficiaries of the crisis. This trend is already becoming apparent. For offices, we expect lettings to increase in the foreseeable future and the transaction volume to rise as well.
For property valuation, the corona pandemic means the need for even deeper analyses and further differentiation even within an asset class. Even the much-maligned hotels in the pandemic can represent interesting investments if the location, concept and lease are right."
Contact person: Sigrid Rautenberg, Head of Communications, rautenberg [at] bulwiengesa.de