The COVID-19 pandemic has left the signing of many real estate operations in the air, paralysed the market for offices and retail and has stagnated the day to day management of investment funds that were considering new purchases in Spain. Everyone is on their toes faced with the uncertainty of what will happen after the state of alarm, and how the Coronavirus crisis will affect the Spanish real estate market.
Our natural reaction is to think that until the situation gets back to “normal”, investment activity should be paused and we should wait for the market to be reactivated. However, the reality is that these hard times bring opportunity, which is scarce, not to say non-existent when the economy is back on track and everything is running smoothly. Times like the aftermath of the Coronavirus are times to harness the power of the future. Investors should have no reason to abandon their plans before this crisis and jump on the opportunities as they arise. In the mid-term, the profit margins and financial growth of these opportunities will be much greater than they would have ever been under normal circumstances. Now is the time to work towards financial freedom in the future.
Anna Gener, CEO of Savills Aguirre Newman’s Barcelona office says: “Previous experiences of other crisis have taught us many things, and perhaps the most relevant and common lesson is that once the most critical moments are over, the recovery of the real estate sector 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 positioning the real estate sector as an investment should be strengthened after this period”.
Lower interest rates to move the market forward
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. Also, 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. These are signs that support Gener’s statement when she states that now is the time to get the ball rolling on investments in the real estate sector. Not only are prices going to drop but so are the costs of borrowing money.
Ramon Riera, president of FIABCI Spain and Europe, states that “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 sector.” Referring to the measures taken by public administrations, as well as the financial sector, he explains that: “they are much more proactive than in 2008 to get out of this health emergency without a major negative impact on the Spanish economy.”
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 considered real estate 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.
Riera also emphasises 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”. He predicts that “when the confinement is over, there will be fewer meetings outside the office, less travel and the activity will be more focused on conference calls and video calls.”
The way we do business will change
Our way of conducting business will change dramatically given this world crisis. We are now moving towards a future that uses technology to enhance our work, make us more efficient and brings us closer together, without meeting face to face. We have already been using technology and integrating it into the real estate business, especially developers using virtual tours for clients to view their future built home. This is going to grow at lightning speed and enable cross border operations, without limitation in space, distance and time. The technology is already there, smart contracts are in place to take a deal from viewing to full completion without physically having to be present. Now it is a question of implementing it and making it a way of conducting business. Working remotely will become a way of life, allowing people the ability to combine work and quality family time, which has been neglected in the past. Technology will help us move forward and get back to our basic needs and what is important. This crisis has reminded us of what is important.
Real estate agencies expect a short to medium term recovery
The main real estate companies have taken advantage of the health crisis to plan how they will deal with the coming months after the halt. 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,” says Vaughan.
For Thibault de Saint-Vincent, President of the Barnes Real Estate Group, which specialises in luxury products, “the situation is 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 at 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 investors 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 crisis.
Another relevant factor that will become evident after the crisis is the risk of public intervention on private businesses and 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 crisis.
The rental housing market shows signs of flexibility
In this crisis, we are seeing encouraging news from corporate rental housing entities. 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. The management of large holders is an unstoppable trend that will solidify after this crisis.
