Virus shock hits the property market

– but the investment demand continues

Virus shock hits the property market – but the investment demand continues

27.3.2020

It is still too early to give an accurate estimate on the impact of the coronavirus on the property market. As the initial shock evens out and the situational picture sharpens, it has become clear that investors’ interest in the property market continues. All previous drivers of the property investment market have grown stronger; the interest rates remain low and the volatility of equity market has increased significantly. However, this does not mean that the property investment market will escape this situation unscathed.

At the moment, we operate as normally as we can. Construction firms are advancing their projects to the best of their ability. Property owners are continuing preparations for planned sales and taking care of the operations of the current portfolio by, among other things, actively speaking with lessees and other stakeholders. The interest of international investors in Finland has continued, but the closing of the borders has slowed the processes down, at least.

However, the atmosphere on the market is still expectant and decisions are being pushed back at the moment. The effects of the current situation are visible from the practical side of everyday working life: such as reduced chances to visit properties, make property inspections and show properties to potential lessees.  Any larger impact on the yields required has not been seen because there have been few deals made in this unusual situation.  It is natural that there is pressure on retail premises because of momentary drops in cash flow, which in turn affects the pricing of properties in the short term. 

The quality commercial assets, meaning premises that have a financially strong tenant, long leaseagreement, excellent location and high quality building—are easier to put a price on and the demand for such properties is likely to grow even stronger as “safe haven” investments. On the other hand, in more management-intensive investments or value add investments the pricing is more challenging and the risk analysis is emphasised more. The availability of debt finance for riskier assets can become more difficult, at least momentarily.  Therefore, if the crisis drags on, the gap between the pricing of properties with different risk profiles will continue to grow wider. The investment market is also affected by the financing of new property investments. At the moment, credit decisions of new projects may slow down, as the crisis has only just begun and the banks are focusing their resources on the acute conversations with corporate clients. Also for financing, the safety of the investment is emphasised at least momentarily. There should now be more demand for project-specific analyses than ever before. The overall situation on the investment market and the effects on the market will become clearer in time.

Service sector hit the hardest
The strongest focus concerning the effects of the coronavirus is currently on the service sector. This crisis is set apart from previous financial crises by its strong and fast impact on the service sector. In this situation, the retail premises and hospitality sector are suffering the most, and within these industries small and medium size enterprises especially. Sales in sectors which relate to daily needs, such as the sales of grocery shops and pharmacies, have increased and the demand for the services of the social and health sector are certain to increase. The crisis can be seen directly and strongly in the sales of durable goods. It is to be expected that, in order to overcome the shock, the owners of shopping centre properties are being asked to be active and show good leadership in the management of shopping centres.

The predictions for how long the epidemic will last vary, but the general opinions concerning its impacts range from 3 to 18 months. The effect of closing restaurants and restrictions on movement deepen the tense situation facing companies even more, but society's aid packages will help companies get back to their normal state. The services or the need for them will not disappear and the recovery of the national economy should be fairly quick once people return to the services. As the situation normalizes, there is certain to be transferred demand that focuses on some of the services. For example, hair salons, dental hygienists and physiotherapists are likely to find themselves fully booked shortly after people are able to return to their normal everyday life.

Larger rental projects continue

The virus will make a dent on employment and it will take some time for it to return to the normal level. The biggest employment peak is certain to be in the labour-intensive service sectors, but there will be peaks in employment in other sectors as well. The positive thing is that in leasing operations the largest projects will continue to move forward as normal, while some of the small projects are now on hold. The situation facing office users depends largely on the industry and the structure of turnover. If the situation is protracted, the demand for premises might start to focus on more affordable premises and, in the long term, the migration between different areas might increase.

The current situation is changing the working culture of many companies as we are indeed in the middle of the world's largest ever remote working trial, and what we learn from it will have an effect on the future. The technical readiness for remote work is increasing in this emergency situation, but it is another matter entirely whether after this 'trial' office workers are willing to stay at home or if the value of office premises will yet surprise us.

 

toimialat

Situational picture of each form of premises

Offices
• Leasing projects have continued, the difficulty of conducting property visits slows projects down.
• Some of the search processes of premises have been put on hold, especially if the search is for larger premises.
- If the situation is protracted, the demand for premises might focus on more affordable premises.
• The situation of office users depends largely on the industry and turnover structure of the user.

Retail
• The hotel market and some retail premises are suffering the most in this situation and the same is true for entertainment and restaurant services.
• It is expected that especially in shopping centres property owners have to assess long- and short-term cash flows and bear the responsibility for the difficulties.
• There have been requests for temporary reductions in rent, and many property owners have granted rent-free months with the condition that, as the situation improves, rents are paid back.

Logistics
• In the short term, online sales will increase the need for premises, but not all logistics solutions serve online sales.
• We should keep a close eye on Finnish exports as they still lean largely on the export of investment goods which can, at worst, slow down fairly quickly.
• However, there is lots of competition in the logistics sector, which means that if storages start to fill up but goods do not need to be moved elsewhere, operators' buffers will be quickly depleted and the growth of online sales might not necessarily compensate for the stagnation of other logistics.

Apartments
• In the short term, there are no big effects to be expected.
• the rental market has evened out so that people are not looking for new apartments or replacing existing apartments.