Post-COVID-19 Real Estate analysis

Post-COVID-19 Real Estate analysis

The Covid-19 global pandemic has totally changed the world in a few weeks. Nobody could imagine one month ago the social and economic impact we’re now facing and the consequences follow in the near future. 

The Spanish real estate sector was in a critic economic cycle. However, it was still working as there were investors willing to invest. The residential businesses in the major capitals was stuck and so the prices weren’t attractive, but in a situation with negative interest rates and financial markets at historical maximum, the real estate sector was still attractive for investors looking for a add-value investment business, in most cases. Alternative investments such as coliving and coworking, office buildings, hotels and above all, care homes and student dorms, focused all the investment activity. 

As the state of alarm started 14 March in Spain, and all the event that would subsequently be spread globally, the Spanish economy stopped its productive and consumer activity, by then, we all realized something was about to change. The real estate sector stopped alike the other sectors. There was barely construction work and there was a trading stagnation. People couldn’t visit the properties, and the numbers with which we previously calculated the feasibility became nothing but useless.  

Having this panorama, it has taken us a while to try to figure out how things will develop in the near future and yet, we can’t ensure it’ll be that way. However, there are certain criteria that can help us predict how things will go in this sector. 

We must start from the premise that, this crisis is not like the one of 2008, that crisis was based on due to an increase in house prices and from an excess of leverage of companies and households, which resulted in a financial crisis that left markets without liquidity, and subsequently moved to state funding. Currently, the banks are recovered, central banks provide liquidity to the markets, most companies can refinance their debts and investors are able to invest in a market that provide opportunities. 

That being said, the current problem is deeper and more immediate than in 2008, during that crisis house prices took almost 6 years to fall by 30%, since owners weren’t willing to lose profits whereas now, according to most market analysts, chances are the prices will fall in average 10% by the end of this year. What is more, it is likely that the prices will follow that progression in 2021, although they can be stopped by avid investors willing to buy into a market with affordable prices and that can provide interesting returns within 3-5 years. 

The offer will increase due to liquidity needs and rising unemployment, many freelancers will be forced to generate income and at the corporate level, there will be divestments in sectors such as the hospitality industry, that will have to face a loss of profits and that will have to restructure their businesses in order to be sustainable. 

On the other hand, at the beginning the demand will be significantly reduced due to uncertainty and changes in its fundamentals, such as job losses and wage cuts. 

No one can predict whether it’ll be a v-shaped or a u-shaped recovery, it all depends on two conditions:

  • Firstly, to mainly the change there should be an increase in investor demand, which should begin with opportunistic investors, large assets, investment funds, etc. Since they will see opportunities in a market in which many months ago they couldn’t enter because there were no assets at a good price, then giving way to private investor with purchasing power and with the capability to take risks. 
  • Secondly, in order to mark the real timing recovery of the real estate market, the management of the crisis carried out by the Government will be fundamental. It will be very important that they know how to measure their forces and agree upon measures that not only make the most vulnerable social classes go forward, but also the business fabric on which employment depends so that it can remain on a consistent enough basis to get the economic recovery and create jobs.   

In any case, there appears to be consensus among most real estate analysts on a possible recovery in average house prices by 2022 and 2023, time where 2019 prices could again be reached and exceeded. 

This sector will inevitably change due to the magnitude of this crisis, early-stage companies will have losses and they will have to be refinanced. Many companies will have to make new strategic plans and adapt them to the new scenario, and above all, there may be major changes in the typology of new products. We shouldn’t dismiss that during this lockdown many people have changed their criteria when choosing where to live, as the way we work has changed and could change for the future, as a result of telecommuting. So that, why would anyone choose to live in a small flat without balcony and open spaces, if they could choose to live in a big house with a garden and in which they can telecommute and be comfortable at the same time and for the same price. Similarly, it is likely that many companies are already considering reducing costs and centralizing resources in smaller, more functional offices, outsourcing jobs that can be done outside the office.  

In short, we’ll have to pay attention because what’s coming is challenging and we have to remain calm, there will be rapid changes and probably opportunities. 

Pablo Barriopedro, Real Estate director. Alternative Assets by Fellow Funders.

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