This COVID-19 pandemic is having a major impact on all human activity globally. Against this backdrop, it is also inevitable to ask ourselves today what repercussions this situation will have on the economy, the real estate market, companies and asset valuation.
The current situation is unpredictable, unusual and highly volatile, and the scale of its impact will depend on how long it lasts.
Paradigm shift vis-à-vis COVID-19
The situation generated by COVID-19 is shaking the foundations of all business models. But this is not necessarily a bad thing, as the restrictions have led to a forced and dizzying adaptation, which has shown that Spanish business is better prepared than expected.
Moreover, nothing will be the same after this situation as it is transforming people and businesses.
Consequences and trends in business behaviour
a. Rethinking globalisation strategies by companies.
b. Enhancing teleworking.
c. New models of contractual relations.
d. Increased R&D investment.
e. Increased use of technological tools (AI, AR, VR, etc.).
f. Review of perceived value of tangible or intangible assets of companies
What impact is Covid-19 having on the different sectors?
We see how sectors that were already hard hit before the crisis, such as the automotive, banking and retail sectors, are being forced to accelerate their transformation towards a new industry (car sharing, Fintech, e-commerce). We are also seeing how increased investment in research and development is driving growth in other sectors, such as bio-health, food, transport and home entertainment.
How is Covid-19 affecting the real estate market?
We are facing difficult months both for the real estate sector and for the economy in general. Even so, we consider it likely that this situation could bring about a paradigm shift in the real estate sector as a whole. A situation from which, in many respects, we can emerge stronger, as well as modernised.
Construction:
- For the time being, the construction is within the activities permitted under the state of emergency.
- Major efforts are being made by large developers to maintain their business plans and delivery schedules. On the other hand, almost all the works carried out by small local developers have been paralysed and affected by ERTEs.
- Asprima has already warned of the economic consequences of completely paralysing construction, with an impact on GDP of -4.5%.
Residential:
- The signing of sales and mortgages has suffered a drastic reduction due to the coronavirus. Both the General Council of Notaries and the Association of Property Registrars have activated protocols in accordance with the current scenario. They have restricted their activity to what is strictly urgent, so that only those operations that were already prepared for signature will be completed, as well as those that have a compelling reason.
- As financial institutions continue to operate (albeit adapted to teleworking), it is possible to start the mortgage application process. Real estate credit intermediaries continue to operate at 100%.
- The declaration of the state of alarm and the ban on opening shops to the public could put 15% of total annual sales at risk. This figure could increase with the extension of the state of alarm.
- Faced with this situation, several real estate agencies are offering virtual tours to keep customers' interest alive.
Retail:
- Investors are waiting to see how the market performs. Both private investors and family offices continue to analyse investment products, increasing caution in their analysis and making broader decisions.
- Planned sales processes are being halted or their deadlines are being extended, as are the due diligence processes underway. Some foreign institutional funds are considering their new investment strategy in view of this new situation.
- Windows of opportunity are appearing, such as falling rents and market correction, especially in shopping centres and medium-sized parks.
- During the previous financial crisis, the High Street maintained rents and withstood the market paralysis and became a safe haven security.
- E-commerce is experiencing a new upturn. This may be the turning point at which a large part of the population that was still reluctant to buy products on the internet will make their first purchase, and they will continue to do so in the future.
Offices:
- Investment in the office sector is not suffering the same impact, at least for the time being. Although office demand and first-stage searches have paused, it is very likely that draft contracts about to be signed will continue.
- It is also likely that many landlords will offer discounts through grace periods, in order to continue to generate interest.
- The office market is one of the markets that will have to adapt after the crisis, as the situation has led to the biggest experiment in teleworking in history.
- It is likely that, once normality is restored, the option of teleworking will be considered by a large number of companies, which will bring about a change in their needs, boosting initiatives that were already growing, such as coworking.
Logistics:
- We observe an increase in the contracting of logistics land, where operators are looking to respond to the storage and distribution needs caused by the coronavirus.
This phenomenon is likely to be replicated in central locations in large cities, with the aim of creating “city hubs” from which last mile delivery can take place.
Others:
- An adjustment is expected in the rents of hotels and student residences, which have come to a complete standstill.
How is the investment market performing in the face of Covid-19?
Investors are in a state of wait-and-see mode, analysing fluctuations between investment products and increasing caution in such analysis. This applies to both domestic and international investment. In any case, a rebound in international investment is expected once the health crisis is over, bearing in mind that attractive returns will be available at a time when interest rates will remain at historic lows.
Does Covid-19 affect asset valuation?
- As in other aspects of the macroeconomic situation, we will have to wait to know the duration of the restrictions to estimate the impact they may have on stocks, as the current standstill leaves them in a suspended situation.
- The Spanish Association for Value Analysis (AEV) has communicated to its members a number of criteria and considerations regarding restrictions on freedom of movement, including:
- The activity carried out by appraisal companies and collaborating professionals is not subject to the suspension obligations set out in RD 463/2020, so that, to date, it can remain active.
- Teleworking of office staff is recommended.
- RICS has also provided recommendations to all its members as well as to regulated companies on the evolution of business models as well as the key parameters to be taken into account in each of the valuations performed with this methodology.
Precautionary measures are put in place to avoid contagion, both on the part of the worker and the client, during physical inspections of buildings.