Covid-19: what impact on European real estate valuations?
by Thibaut Cuilliere, Head of Energy & Real Assets Research, Natixis, Stéphanie Dossmann, Real Estate Specialist, Natixis CIB Research, and Sylwia Hubar, Real Estate Specialist, Natixis Economic Research.
The Covid-19 outbreak and the decline in GDP unseen since 1945 are a real challenge for European real estate markets. Our experts forecast that residential will be more resilient, with valuation drops of maximum 5%, followed by offices, 10% to 20%, and up to 30% for retail real estate.
In the office market, the negative impact on demand coming from remote working development will be partly offset by the proven need for less density in the office space. As corporate insolvencies are expected to increase, we expect the take-up to decline by 30 to 35% from the levels reached end-2019, in line with what has been seen in the previous economic downturns in 2002 and 2008-09. Furthermore, companies will give priority to restoring their business, hence postpone their real estate projects. Moreover, cross border investment flows will fall, while they have been supporting the valuations in European offices over the past years.
Retail real estate will be hit sharply by the coronavirus crisis. We expect significant yield expansions for all segments over 2020-21, especially for shopping centers. The air traffic slump and borders almost closed will have some specific knock-on effects on retail real estate. The fall on retailer sales already have negative impacts on retail property owners, due to rents cancelation or postponement measures in some countries such as France. In hospitality, and without envisaging so far any “stop-and-go” measures of lockdown, we assume a 15-20% drop in overnight stays in 2020 for big European cities due to the collapse of tourism flows. On the longer term, as for offices, some trends will accelerate, and others will emerge. Will social distancing become the new normal in shops? Retailers, together with their landlords, will have to adapt otherwise e-commerce will definitely take a great leap forward.
The residential market will be the more resilient owing to its role of a consumption good providing shelter. It will be adversely affected by fears of long-lasting economic recession, household insecurity about employment and income prospects and a turbulent stock market depressing household financial wealth. On a more positive side, monetary and fiscal policies will stay accommodative through 2020 which, along with looser macroprudential measures, should help residential markets regain strength in the second half of the year. Moreover, residential real estate is likely to benefit from flight to core investments and the development of working from home habits.