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OPINION

The European Real Estate Market Today

The European Real Estate Market Today

Over the last few days, five separate major capital owners, all HNWIs (high net worth individuals), have contacted us (international real estate consultant DANOS). The  knock-on effects of the coronavirus – widespread panic, quarantine, falling oil prices, and weakening oil-dependent currencies like the Russian ruble – are hitting the real estate market hard.

The hotel and retail segments were the first to fall. Cafés, restaurants, and shopping malls have been forced to close their doors – and as we speak, companies are cutting costs and downsizing, while Hotel and Food and Leisure operators are asking landlords to lower rental rates.

The first bankruptcies in the hotel segment have already started in Europe and it’s likely that buyers will be able to negotiate up to 20% off the asking price of some properties in already overheated markets.

Long-term residential rentals — apartments and entire apartment buildings — will be affected the least. Most tenants will only ask for discounts if the macroeconomic decline is significant and drawn out, in other words, if GDPs fall sharply and unemployment rates rocket. This explains why in a normal economic situation, residential property yields less than commercial: the lower the risk, the lower the yield.

We will witness a general decline in global economic growth rates – it’s anticipated that by the middle of 2020, this decrease will seriously affect the European and US office space segments, forcing companies to ask for rent reductions or to move out of their offices if their landlords won’t budge.

For most companies, this year will be a write-off from an economic standpoint. The most optimistic forecasts predict that the normal real estate market rate will recover in the autumn.

Many countries, acting through regulators, have announced supportive measures for the market. For example, the FED has slashed its interest rate to 0% and it’s likely that the ECB will resume quantitative easing. We expect that cheap leverage will allow the market to weather the turbulence without catastrophic losses.

Despite the crisis and quarantine, HNWIs have wasted no time in actively showing their interest in investing in foreign real estate. Over the last few days, five separate major capital owners have contacted Danos An Alliance of BNP Paribas Real Estate. 

Most investors are adopting a rational approach: they want to find attractive investment opportunities over the next four to six months. Nobody expects to be able to buy anything cheaply right now because:

The interest of HNWIs during the crisis is not a coincidence. A number of our clients have told us that they have been waiting for a recession to hit the overheated market so they can buy discounted properties but investors understand that regardless of the crisis, pumping capital into good real estate remains very difficult.

1. at the moment it’s technically impossible;
2. bankruptcies can be expected in due course.

HNWIs from developing markets, including Russia have mostly been holding their capital in stable currencies to avoid the consequences of tumbling local currencies.

However, wary of the situation worsening in their homeland, they’ve been quick to direct their attention to international investments – on average, they’re investing a total of €50-100M in multiple projects, parting with €10-20M for each. The average yield expectations are realistic at 10-15% per annum in dollars or euros. For most major investors, this is not the first step towards real estate investment in Europe and the US.

According to our experience, Russian investors are not the only ones who want to buy assets at affordable prices during this crisis. Those with significant amounts of capital in other markets are also taking a keen interest.

We expect up to 20% to be discounted from some properties and we don’t expect any sales at rock-bottom prices because:

- too much cheap leverage has been accumulated in the world over the past five to ten years;
- governments will endeavour to protect businesses and people.

With regards to Danos‘s business, we expect the number of enquiries from Russian-speaking buyers with budgets of around € 2m to decline by about 50%. However, we don’t expect the rate of enquiries from international buyers to fall: Chinese and Asian investors will probably remain just as interested in foreign property as they were before the crisis. This is because these clients will not be affected by the fall in oil prices and currency fluctuations as severely as Russians.

In three to six months, expect to see some attractive offers appearing.

We see several opportunities materializing:

1. Crisis management of facilities, managing tenant relations;
2. A demand for distressed assets, primarily in the hotel segment as it’s the most affected, but also in other niches, depending on how hard the markets are hit;
3. Land development because the risk premiums for such assets will be higher.
4. Most European countries are past or at the peak of COVID-19 infection and their governments are now looking towards strategies to reactivate their economies. Whilst lockdown measures will be eased, social distancing may still apply, leaving businesses vulnerable. This is likely to mean that governments will maintain very ambitious measures to support their economies.
5. Governments have large stimulus packages already in place to support the private sector through the paying of wages and supported employment schemes. More could be announced.
6. Policy responses should be effective in supporting the economy. Nonetheless, global GDP may contract by 2.5% in 2020 before recovering sharply in 2021 to 5.6%.
7. Expected disinflation in the short term. In the longer term, the range of potential inflation outcomes has widened as a result of COVID-19.
8. Coherent international cooperation has been largely absent since the beginning of the crisis. European Union (EU) members have struggled to create a common approach.
9. The EU will support members through the European Stability Mechanism (ESM) and will tolerate breaches of the Maastricht criteria on debt. Over the longer term this will test European solidarity and calls for reform may go unheeded.

 

As the lockdowns end and we look forward to a time after the pandemic, it’s unlikely that technology changes will be reversed. The use of new technology-enabled tools for the property-buying process will be further cemented in the near future as some degree of social distancing looks set to continue, and we believe they are here to stay.

“E-conveyancing and digital signing will streamline the purchase process, with a beneficial impact on all, but particularly cross-border transactions, and a number of countries are looking at changes in law to enable these.” Panos Danos CEO of DANOS International Property Consultants (www.danos-group.com) concludes. 

 

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