That church buildings will one day be traded is hard to imagine. At this time, though, they are one of the few building types that stand empty because of the coronavirus crisis.
In what ways does the coronavirus crisis affect the various real estate segments? How are economy and labour market developing? What effect does the crisis have on valuations? Our division heads will help you assessed the situation by sharing share their insights.
- Business Cycle & Labour Market
- Residential & Micro-Living
- Logistics & Industrial
- Hospitality & Leisure
(Note: baseline date is 17 March 2020)
1. Business Cycle & Labour Market
Martin Steininger, Chief Economist at bulwiengesa, steininger [at] bulwiengesa.de
“Until just a few days ago, a lockdown was an unimaginable scenario in Germany – are we facing an economic collapse like in 2008? Factually speaking, the financial and economic crisis poisoned the system longer with its toxic securities than the temporally limited quarantine now imposed on German society. Unlike 2008, banks are stabler, central banks provide more qualified support, and the body politic has been much more agile in its response – in short, it would be misguided to evoke doomsday scenarios.
Safe to say at this time is that the spread of the corona virus will have some adverse economic ramifications. Even now, supply chains are severely strained by manufacturing and trading constraints; Germany is particularly exposed to the associated effects because it is an export-driven nation more so than other countries. In addition, slowing demand in the export sector could have a growing impact on the German economy. At the moment—and this is something economists agree on—Germany’s national economy is particularly susceptible to global crises. Some companies have already stopped hiring or shelved investments for an indefinite period. Once again, the spectre of recession looms large.
That being said, major repercussions for the labour market are unlikely. Germany’s job growth has gradually and partially uncoupled itself from the business cycle over the past years. Both digital transformation and demographic change have brought about a shortage in skilled workers. For more than ten years, the trend on the labour market has proven rather robust and resilient against cyclical fluctuations in Germany or indeed worldwide. In many sectors, the current development will speed up the trend toward working from home – instead of WeWork, the long-term job model of the future could actually be MyWork, meaning the home office.
If the German government were to launch an economic stimulus program, it would not start generating economic thrust until the second half of 2020, at the earliest, and it would obviously be unable to deflect a technical recession during the first half of 2020. But fiscal impulses are urgently called for at this time because even private consumption is beginning to slow. It should also be remembered in this context that eight percent of the German economic output is tied to domestic tourism.
Any forecast is fraught with considerable uncertainty and based on assumptions deemed most probable at the time of its compilation. Now, if you take the assumption with the highest probability, which is that the recession will be short-lived and that the pandemic will subside by mid-year before massive economic catch-up effects kick in, the losses incurred under this scenario during the first half-year will to some extent be compensated during the second half-year so that, while the year-end result may be negative, it will predictably be a far cry from the experiences made during the economic and financial crisis of 2008.”
2. Residential & Micro-Living
André Adami, Division Head Residential at bulwiengesa, adami [at] bulwiengesa.de:
“The ramifications of the coronavirus pandemic on residential investments and property developments in the housing industry will be comparatively mild compared to the effects on other asset classes.
For safety-oriented investors, such as pension funds and insurance companies, the massive stock market losses will make the sustainable stability of residential real estate even more important. Cash flows will hardly dry up, because they are based on countless lease agreements with private individuals. If anything, the situation is expected to reduce tenant churn even further because tenants are loath to give notice in times of economic distress. Long-term investors stand to benefit moreover from the yet lower rate of financing rates. Since the economic recovery process is likely to take 48 months or more, interest-tightening cycles of any sort are off the table for the next few years.
But in the short- to medium-term future, new lettings and sales can safely be expected to decline until the number of new infections subsides. Especially private customers will keep a very close eye on their safety-at-the-workplace situation and put investment decisions on the back burner when in doubt. Property developers, too, will be affected by this. Other adverse factors include disruptions in construction and planning processes.
However, the residential sector could principally gain in significance if the coronavirus crisis makes people realise once more that family and an owner-occupied home are more important than city-hopping weekends.”
Felix Embacher, Division Head Micro-Living at bulwiengesa, embacher [at] bulwiengesa.de:
“The ramifications of the coronavirus crisis for the residential section of the micro-living asset class are too insignificant to capture in a short-term snapshot because lease agreements are signed for at least six months. If, however, the coronavirus crisis were to wreak fundamental long-term changes on our social interaction and global networking, the micro-living segment would not be spared either. Specifically international students would no longer be able to enrol in German universities because of national travel restrictions, which in turn could cause demand for student apartments to dry up. As far as serviced apartments, the other segment of the micro-living asset class, are concerned, the situation will be marked by short-term setbacks in analogy to the hospitality sector in general of which they form a part. This will be true particularly whenever providers signed master agreements with corporate clients who would normally ensure that operators get the bed occupancy rate they need to remain profitable, but who are now particularly hard hit by the current economic upheavals.”
Sven Carstensen, Division Head Office at bulwiengesa, carstensen [at] bulwiengesa.de:
“The market for office real estate responds very sensitively to cyclical fluctuations, which means that the recession now to be expected will leave its marks. Assuming that all measures for curbing the spread of the coronavirus prove effective and that we can expect a swift economic recovery to set in roughly by mid-year, the following developments seem realistic: For one thing, the strained and demand-led market situation in the Class A markets will cool off and the situation in most office markets normalise – which would mean that vacancies will start growing again even if the overall level will probably stay moderately low.
Secondly, times of economic uncertainty tend to reinforce the trend to renew existing lease agreements. We assume that decisions to negotiate new lease agreements will be postponed.
Thirdly, co-working providers will be directly and particularly hard hit by declining demand. The same goes for companies that are affected by industry-specific hardships in the sectors transport (e.g. aviation) and tourism. These will require financial assistance more than others, including by their landlords. Fourth and finally, financing arrangements for development projects will be reviewed and possibly shelved.”
Ralf Koschny, CEO of bulwiengesa, koschny [at] bulwiengesa.de:
“Due to the drop in footfall in shopping centres and to the reticence shown by consumers, we expect the pressure on retail rents to keep growing. Moreover, the textile sector is likely to be hit by delayed deliveries from China, which could have consequences for the fall collections. It is yet another fact that adds to the strain of the current rental situation. With this in mind, we predict a continuation of the current trend of investors concentrating on retail real estate that has a high grocery share.”
Dr. Joseph Frechen, Division Head Retail at bulwiengesa, frechen [at] bulwiengesa.de:
“In the retail trade, the ramifications of the coronavirus crisis differ from one sector to the next. The retailing of groceries and toiletry products is booming at the moment. Apart from toiletry products, cleaning agents and disinfectants, the non-discretionary segment has so far reported no difficulties in replenishing goods from their usual procurement sources or via their usual procurement channels. Unless border controls are stepped up within the Schengen area and cause temporal delays, e.g. in food transport, or unless an export ban is imposed, e.g. on disinfectants or toiletry products, no supply bottlenecks appear to be threatening.
By contrast, significant impairments are already visibly in the discretionary segment. Footfall in shopping centres and high-street pedestrian precincts has reportedly taken a nosedive, with the footfall in some pedestrian precincts having dropped by up to 30 % compared to March 2019 (based on Hystreet.com, comparing Friday, 13/03/2020, to Friday, 15/03/2019).
Online retailing stands to benefit from the situation. Retail warehouse parks have also stood their ground so far. They benefit from their convenient accessibility by car. They are also generally less frequented than shopping centres, making it easier to dodge larger gatherings of people.
At the moment, the willingness to spend on capital goods or discretionary products is inevitably declining or simply becoming impossible to act upon in case retailers are forced to lock down across the country. DIY and garden supply stores will probably survive this phase more or less unscathed.
5. Logistics & Industrial
Tobias Kassner, Division Head Industrial and Logistics at bulwiengesa, kassner [at] bulwiengesa.de
“Keeping storage areas as small as possible used to be the maxim for many companies. Even the need to maintain spare parts warehouses was scrutinised against the background of additive manufacturing processes. Why bother stocking things that you could produce on the spot? The Coronavirus crisis could arguably check or even reverse the process. Logistics and industrial production are closely intertwined. As a result, the ramifications for the types of property occupied by either group are quite similar.
Neither will the interruption of supply chains, as currently seen, have short- to medium-term repercussions for the logistics real estate industry, because lease agreements tend to be signed for lengthy terms. This would apply even if the demand for storage spaces were to decline in correlation to the slowing pace of the economy. In the medium term, it could be an option to return to the sourcing of local substitutes and to realign the machinery accordingly. At the same time, the volume of imports, e.g. from areas in China that have gotten coronavirus infections under control, has rebounded on a modest scale.
That said, the situation will have ramifications for property developments. Decisions are delayed, as stakeholders switch to a wait-and-see strategy for the medium term. This is true for the actual building activity as much as for real estate financing and investment activities. Analogously, occupiers of logistics real estate will initially wait and see how the pandemic unfolds.
But what about the longer term? For the time being, we assume that the coronavirus crisis will be successfully contained within the next year or two, and that the global economy will regain its momentum. Manufacturing companies will restructure their supply chains to reflect the experiences made during the coronavirus crisis, and to increase their resilience. To this end, they will eliminate their dependence on global transport flows. This would imply a partial return to local suppliers. Wherever this proves impossible, e.g. because the commodities or know-how is unavailable or for costs reasons, storage capacities will be expanded.”
6. Hospitality & Leisure
Dierk Freitag, Division Head Hospitality bulwiengesa, freitag [at] bulwiengesa.de:
“At this time, the ramifications of the coronavirus crisis on the leisure market in general are enormous. Since there is no sign that things will improve in the foreseeable future, the situation will continue to deteriorate for hotels, restaurants, clubs, theatres, cinemas and similar venues. Most affected are, of course the operators, more so than the real estate industry players. But this is bound to change in the medium term. Germany’s hospitality and leisure industry, which is still dominated by the mid-market sector, has seen its guest and revenue figures drop sharply in recent days. STR/Fairmas reported that hospitality revenues across Germany decreased by 42 percent during the first two weeks of March. That is, before the borders were even closed and before private stays in hotels were prohibited. In Rome, meanwhile, the current occupancy rate is a disastrously low 6 % (as at 16 March 2020). This puts the continued existence of many companies in serious jeopardy, rendering them unable to pay salaries, leasehold rents, loans and other liabilities as usual. For the time being, things may look different for high-net-worth operator chains, but historic evidence shows that even these tend to renegotiate rents and lease terms during times of crisis. Real estate asset holders will inevitably have to sit down with their tenants to find financially viable solutions, and real estate will surely depreciate.
In the areas of new-build property developments and real estate transactions, we have clearly noted a new reticence lately that is due not least to a funding shutdown. Especially the hospitality sector, which is subject to particular scrutiny in regions threatened by excess capacity, real estate activities are seriously stalling – and this is true for leisure hospitality as much as for urban hospitality. The upshot of this could be that investors will reconsider their acquisition policy, that selling prices could soften and that the focus will shift to a more careful selection of operators in the wake of the crisis.”
Dr. Heike Piasecki, Division Head Healthcare Real Estate at bulwiengesa, piasecki [at] bulwiengesa.de:
“There is growing concern in care homes: 21.5 % of Germany’s residents are older than 65 years of age, and thus belong in the high-risk group for whom a virus infection poses a greater health hazard than for younger people. Roughly 820,000 residents are accommodated in around 10,000 care homes. The challenges currently created by the direct ramifications of the coronavirus pandemic are particularly daunting for care homes. On the one hand, the challenges are caused by the strict implementation of the hygienic measures that are to protect residents and staff. In care routines, this necessitates special workflows but also the procurement of sufficient disinfectant and protective gear, a task currently compromised by limited availability of certain supplies. On the other hand, care homes must ensure that the residents receive proper care, and as employees fall ill, the shortages of qualified staff become a real threat. To protect their residents and employees, some facilities have imposed visitor bans.
There is a chance that the capacity utilisation of these facilities could actually be relieved in the short and medium term as a possible result of increased fatalities among the residents and delays in the reassignment of the vacated care spots, an admission ban due to staff shortages, or temporary top-down constraints imposed through health policy measures. The decline in occupancy can result in a loss of income and, as a consequence, limit a given operator’s ability to cover costs (declining rent revenues, etc.). Insolvencies of minor operators with precarious financials cannot be ruled out in the medium term.
In the fields of assisted living and domestic nursing care by relatives and outpatient services, the ramifications of the coronavirus pandemic will mainly affect the day-to-day capacity to care and provide for people.”
Marcus Badmann, Managing Director of bulwiengesa appraisal GmbH, badmann [at] bulwiengesa-appraisal.de:
“Naturally, uncertainty will always negatively impact the real estate market, too. Decisions to rent or buy property are likely to be postponed. The degree to which market players are affected varies from one segment to the next. If we were to assume that the influence of the coronavirus crisis on the economy will be limited to a few months, the demand for accommodation to let or to sell will hardly bounce back to its pre-crisis level collectively and instantly. It remains to be seen how many market operators will emerge from the crisis unharmed and how many will try to make up for lost time by stepping up their transaction activities.
We do not assume that selling prices will cave in on a massive scale, but consider a drop in the number of transactions more likely. You would generally be loath to sell at an inopportune time, unless you were more or less compelled to do so. From the financing banks’ point of you, everything depends on the duration of the coronavirus crisis. The Mortgage Lending Value Ordinance (BelWertV) specifies expressly that the mortgage lending value of a given property should be appraised 'without regard to temporary, possibly cycle-driven fluctuations in value on the benchmark property market.' Accordingly, there is no urgent need for action in the short run.
The purpose of government aid programs is mainly to provide relief from the worst damages to companies on short notice. In the longer term, the price drops suffered by equities could have a favourable effect on real estate markets that would be reinforced by interest rates maintaining a historically low level. The latter argument is largely confirmed by market players with whom we are in close communication. There is deep unease, to be sure, but everyone we talk to assumes that our lives and business dealings will incrementally return to normal within the foreseeable future. Some decisions will be put on the back burner for the time being in order to wait out the further development and its ramifications. But except for those property types that are directly and visibly hit by the crisis, such as hotels and shopping centres, the crisis will actually bolster the image of real estate as a 'safe haven' investment."
Contact person: Sigrid Rautenberg, Head of Corporate Communication, rautenberg [at] bulwiengesa.de