Real estate assets to fall by up to 10 per cent or more in value, but will bounce back by 2021, says Duff & Phelps
Duff & Phelps, a provider of governance, risk and transparency solutions, has published a survey revealing that nearly four in 10 investors (39 per cent) expect commercial real estate assets to fall between 5-10 per cent in value in 2020, whilst nearly a third (31 per cent) predict a fall of 10 per cent or more as a result of the pandemic.
The survey, conducted by Duff & Phelps’ Real Estate Advisory Group (REAG), polled senior directors and investors in real estate from the US, UK, and Europe, and looked to gain insights into how different sub-sectors across the commercial real estate industry are adjusting as a result of the pandemic and examined the potential shifts in real estate financing.
It’s no surprise that respondents expected the worst long-term damage in commercial real estate to be among retail and hotels (accounting for 37 per cent and 36 per cent responses respectively), with most investors expecting retail property values to decrease between 10-40 per cent over the next 12 months. These sectors have clearly struggled the most during the pandemic, so commercial real estate investors will naturally be looking elsewhere for assets that have proven to be more pandemic resistant.
More than a third of respondents (36 per cent) believed the industrial and logistics sector will emerge the strongest from the current crisis. With an increase in online shopping brought on by the pandemic, the importance of “last mile” facilities—logistics warehouses that carry out the final step of delivery—will become increasingly important. Investors also saw bright spots for residential (29 per cent) and proptech (19 per cent), which they also believed would gain strength after the crisis.
John Slade, Chairman of the Real Estate Advisory Group at Duff & Phelps, says: “Covid-19 has had an unprecedented impact on the corporate real estate sector, with lockdowns effectively shutting down entire sectors for months. However, the damage has not been uniform, as some business sectors cannot be taken online as easily as others. Nonetheless, some sectors have proved remarkably resilient, particularly prime city centre offices and logistics properties. The value of these assets seems to have been maintained so far.”
With economic downturns already confirmed in major markets, investors have identified a global recession as the biggest risk to commercial real estate assets (64 per cent), ranking even higher than the pandemic (25 per cent). Respondents across the UK, US and Europe also believed that economic recovery would take a U-shape (80 per cent), rather than a V-shaped recovery.
However, investors may take comfort in the fact that 90 per cent of firms expected asset prices to go back to pre-pandemic levels by 2021. In fact, more than four in 10 respondents (41 per cent) were more optimistic about the European real estate sector now than they were at the start of the pandemic, with investment and fund managers showing the most optimism (53 per cent).
As a result, 42 per cent of investors either remain unchanged in their capital commitments or are set to increase their capital commitments. Furthermore, 70 per cent of investors said they could deploy capital when needed, with nearly all the investment and fund managers surveyed responding affirmatively to this question, dispelling some concerns about liquidity associated with this area of investment.
Slade says: “If governments decide to shut down world economies, you can expect to see enormous short-term change. But the degree of pessimism among investors is starting to subside, and given the availability of investment capital, I am confident the commercial real estate sector will make a strong recovery.”