Rome, Economic consequences of coronavirus on real estate in Italy
Economic consequences of coronavirus on real estate in Rome and Italy
An instant survey of real estate scenarios photographed the opinion of real estate operators trying to understand how the future of the sector in Italy could evolve.
According to 79% of those interviewed by Real Estate Scenarios, the real estate market will undergo a reduction of at least 10% in 2020. The sectors related to tourism and related industries, therefore hotel, holiday homes, used residential, shops in non-central locations. 41% believe that the international market will also have a reduction of between 10 and 20%.
Institutional investments could also drop by up to 30%, slowing down a recovery that was painfully beginning to be felt in the big cities. Milan may be among the first areas to recover, but it will take at least six months.
80% of the respondents also believe that the consequences of this crisis will be general, not related exclusively to the worst affected territories, while 63% believe that Europe will emerge weaker from now on.
The Idealista / news portal interviewed some of the main Italian real estate start-ups to understand if technology allows you to make sales and purchases even during the health emergency; since the beginning, some start-ups have been reactive and have imposed smart working for employees, facilitated by an agile and already widely digitized structure. The move to telework was automatic for some of them, putting team health first. But, operationally, how is it possible to continue working during the health emergency? Each start-up has its own “recipe” which, at least in the initial phase, is allowing to conclude operations whose negotiations had perhaps already begun. It seems to be decisive, for most of them, the fact that most of the announcements have the virtual tour, so much so that it is noted that the number of consultations and appointments for sessions with agents are increasing. So far, therefore, proptech start-ups continue to operate, especially by concluding or continuing to manage negotiations that have already started some time ago. It is more difficult to understand what can happen with the continuation of the emergency; The main concern is that a physical visit to a property cannot be completely replaced.
The consequences for European real estate
What will be the consequences of the current moment on European real estate? Nuveen Real Estate analysis.
According to the study, these are the global impacts in the short term:
• There will be a sharp slowdown in the hotel sector, shopping centers and the provision of co-working services.
• Office lease volumes are likely to contract, and then return to growth in the second half of the year. However, it is necessary to monitor the profitability of companies and the share price.
• Imports from China by the United States and Europe are decreasing due to the interruption of the supply chain, which could weaken the demand for warehouses closely linked to imports from China.
• The residential sector should prove to be more resilient, however concern remains about the management and returns of student and senior citizens’ residences.
As regards the long-term impacts instead:
• The assessment of the long-term repercussions of the coronavirus emergency requires particular attention. One of the possible consequences will be the need to redefine supply chain routes outside of China.
• In addition, it is foreseeable that the methods of use of the real estate assets by the tenants will change. Office tenants could assess that they need less space in general and opt for smart working for part of the rotating workforce. Suppliers of co-working facilities may experience less demand for close workstations, considering that there will remain greater awareness of hygiene and health.
• A growing portion of retail sales will switch to online channels.
Global supply chains will shorten and companies will diversify part of supply chains outside of China.
The impacts of Covid 19 on the European real estate sectors
Focusing on Europe, according to Nuveen Real Estate these impacts on the main real estate sectors:
In the student accommodation segment, there is a risk that the decrease in applications for admission from abroad for the new academic year will jeopardize income. It will be necessary to monitor the development projects for new residences, especially those that require stringent completion times.
With regard to rental properties, governments have promised support and the temporary suspension of mortgages to landlords.
The difficulty of the moment confirms how important it is to follow a solid strategy that points to well-positioned resilient locations to take advantage of long-term structural trends. The residential sector, in all its typologies, must be taken into consideration in a long-term perspective. And in this perspective, strong winds persist in Europe in favor of rental properties, student residences and co-living projects. The disturbances of the economic scenario could accelerate the demand of the rent segment if the price corrections of the houses were followed by stricter loan conditions. Negotiations for ongoing projects continue, with revisions to subscriptions, funding and the cost of the land. Externally, it is necessary to monitor the developers / owners of existing assets / new projects in case they find themselves in difficult situations.
In the next month the situation of retailers who were already suffering in the pre-virus phase could worsen and a wave of bankruptcies could increase the number of vacancies in all types of retail spaces. Tenants of spaces dedicated to catering will continue to be the most affected. The epidemic will catalyze the shift of consumers to online channels, especially in sectors and countries that have historically resisted the advancement of e-commerce. Retailers who can activate solid online platforms will have an indispensable lifeline for their business model and profitability. Companies without online channels, such as Primark, are in a more complex position. The net operating result of the entire retail sector will drop drastically over the next month, while owners are likely to negotiate in the short term with respect to rents. Impacts on valuations may not be recorded because no asset valuations will be made in the next month. Investment transactions will decrease significantly as investment in retail assets will be avoided in a phase of strong volatility and with net operating results and the base of uncertain tenants. The most opportunistic investments will focus on assets anchored in the sale of food / retail parks.
Companies are likely to take a cautious approach before signing new rental contracts or acquiring other spaces in the buildings they already occupy. Vacation rentals are already being advertised in some countries. In the best scenario, there will be a recovery in the sector in the second half of 2020, but there will be a probable loss of jobs in the offices in the event that the interruption of activities continues in the second half of the year and companies are forced to downsize. A contraction in rental growth is inevitable, rental levels for assets in markets with low vacancy rates in central financial districts (CBD) should never prove more defensive. For co-working, a slowdown can be expected due to the need to keep the distance between people, but markets with a large concentration of tech companies could prove more resistant thanks to the demand for services from companies such as Zoom, Slacke Microsoft, connected the increase in smart-working and the growing demand for video services for home entertainment. In a scenario of prolonged recession we expect a drop in rents with a correction scale adjusted according to the volatility of specific markets. Elsewhere, the risk-off approach could lead to a suspension of development projects in the absence of tenants who had previously signed up to the commitment to occupy spaces, while projects to increase the value of assets will hardly be financed. This situation could create the opportunity to check discounted admission prices. In the meantime, a lower interest rate scenario suggests defensive values for safe core assets, but a temporary misalignment of the raw values cannot be ruled out. The lengthening of transaction times and the delay of new projects are already evident.
The focus of the discussion has shifted to the identification of fundamental logistical structures for the system, necessary to keep the supply chains of food and health devices active. Some of the companies involved are now looking for short-term rentals and some logistics service providers have offered to free up space to allow the flow of these types of goods, if necessary. The trade war between the United States and China has pushed to rethink the supply chains of manufacturing companies globally. This process is likely to accelerate due to COVID-19 because companies are realizing that the difficulty of creating more resilient supply chains is not just about China, and that, in general, there is a need to shorten the distances (also through outsourcing), diversify suppliers and have greater inventory availability. All of these measures will probably come at a cost, but logistical real estate will benefit in return from an increase in demand, with the exception of the large seaports that manage global trade over long distances. On the European continent, locations with lower costs in Eastern Europe, Portugal, Turkey and also in North Africa could benefit. The long-term advantages will have serious risks in the short term, linked to the closure of the factories, the lack of manpower and the interruption of the supply chain; factors that are destined to lead to difficulties for retailers, suppliers of integrated logistics services (3PL) and weaker producers.
Covid-19, forecasts for the Italian economy
In the basic scenario, assuming a slow and selected removal of the anti-contagion blocks starting from the beginning of May, the contraction of the Italian GDP in 2020 will be at least 6.5%: in a single year, a recession of equivalent magnitude to the fall of the two-year period 2008-2009. In the first two quarters of the year, Prometeia estimates a reduction in GDP of more than 10% compared to the pre-crisis situation, with very wide sectoral differences: from -10% of manufacturing to -27% of tourism-related services, up to -16 % of transport services and entertainment activities.
Despite the already announced fiscal measures (over two percentage points of GDP in total this year) – substantial but limited by the high public debt – the depth of the recession and the slow pace of the recovery will only further weaken production capacity and public finances of the country. In the base scenario of Prometeia, Italy would find itself in 2022 with a GDP level still below the 2019 level of over 2 percentage points, with a sovereign debt nailed to 150%.
S&P forecasts for the European economy after coronavirus
According to S&P Global Ratings, the Eurozone will face a recession in the order of a 2% drop in GDP in 2020, equal to 420 thousand billion euros of real GDP due to the pandemic. The risks are all downward, however, since the pandemic could last longer than expected, depressing the eurozone’s GDP by as much as 10%. In 2021, however, a rebound of + 3% is expected, in addition to a further + 1.5% in 2022 and 2023.
At the moment, notes the rating institute, fiscal and monetary measures as well as economic policies in general will be the key to facing the economic emergency that will follow this period. However, although all EU countries have taken similar measures, not all will experience the same speed of recovery due to the different fiscal “breath” that their respective economies will be able to pull. In particular, France and Germany have more funds to finance unemployment than Italy and Spain, which also have a greater number of independent SMEs, which will be the companies most damaged by the economic shock. It is therefore more likely that the French and German economies will recover faster than the others.
( iamges thanks to dario-veronesi )