The COVID-19 crisis in Europe: Impact on Listed Real Estate and expected recovery

The propagation of the coronavirus across the planet has had a disruptive effect in several sectors of the world economy, including real estate. Following the COVID-19 emergency, a new economic crisis has emerged, accelerating some trends already underway in the property markets while also creating some new drivers that will likely define the post-crisis recovery.
To improve our understanding of this crisis and help us define a clear view of the recovery, Oxford Economics developed a comprehensive study on the impact of the COVID-19 crisis on the European listed real estate (LRE). The research seeks to explore all the major underlying trends and drivers of this economic crisis, comparing them with those of other major crises to understand how this recovery may be different in nature from other economic recoveries experienced in the sector. Here we  explore the most important points of the study, highlighting the reasons for expecting the recovery to be much more dynamic  and shorter than in previous crises.
Most financial analysts, real estate professionals and institutional investors agree on taking February 20, 2020, as the ‘official starting date’ of the COVID-19 crisis in the western economies. On that day, most equity and listed real estate indexes started
experiencing the direct impact of the virus spreading around the world. The S&P 500 exhibited seven consecutive days of losses up until February 28, 2020. The STOXX 600 also extended red numbers for seven trading sessions (non-consecutive) up until March 2, 2020. And the FTSE EPRA Nareit Developed Europe index (EPRA Index) turned negative six times (non-consecutive) in the same period. During the last week of February, the total return on Euros for the three indexes was –12.59%, -12.24% and -11.55% respectively – something not seen in more than ten years, and only comparable with the global financial crisis (GFC).
This was just the beginning of a negative trend in most of the capital markets across the world. The increased volatility, pushed by the daily news of an increase in the number of infections, was only partially countered by announcements of several governments and central banks implementing urgent measures to support economies in such an exceptional period.
The term ‘unprecedented’, if superficially overused, is certainly correct in this context. Nearly every economy on the planet was almost completely frozen, simultaneously and in a way that has never been experienced before, including during the World Wars. Yet perhaps the most ‘unprecedented’ difference between this crisis and others before it was the speed and conviction with which economic stimulus was deployed.
The response by many economic authorities saw stimulus packages activated in a few weeks where, in previous crises, these took months and even years to be developed. And it is this response that could be the difference between the lethargic recoveries global economies have experienced in the last decades and what many hope will be a speedy recovery this time, relatively speaking.
Such a unique crisis has several ways of impacting the listed real estate industry. Some are positive, and others are negative, depending on the property subsector. With so many factors at play, the data provides rich comparisons with previous crises, such as the Eurozone crisis in 2011 and the GFC between 2008 and 2010, in order to forecast the type of recovery that we may expect.
In cooperation with EPRA, Oxford Economics published the report ‘IMPACT OF THE COVID-19 CRISIS ON EUROPEAN LISTED REAL ESTATE’[1] in May 2020. This report explores different angles of this crisis and comes with a clear conclusion: under the Oxford Economics’ baseline scenario of a V-shaped economic recovery in Europe, the EPRA index should come back to pre-crisis levels in 2022.
At first glance and out of context, this might look a bit pessimistic and could generate some concerns about the listed real estate industry. But putting it into perspective, it is quite the opposite. A recovery that took eight years following the GFC might take less than 26 months this time. Let us explore the main reasons Oxford Economics proposes for this.
Economic policy response
In the short term, after months of lockdown, the recovery will be highly influenced by the re-opening process and news around new contagions and treatments for the virus. However, the economic policies designed by the governments to face what is expected to be the largest recession in post-war history[2] will play a key role in the medium and long term.
The European Central Bank (ECB) and other central banks in the region have launched a huge expansion of their quantitative easing (QE) programmes. National governments have launched fiscal packages of various sizes, including measures directly aimed at supporting the real estate industry and its tenants, such as mortgage and rent holidays, loan guarantees and direct lending.
However, fiscal measures in Europe are less pronounced than in other regions. Discretionary fiscal spending in the Eurozone averages 1.9% of GDP compared to 9% in the US and 6.9% in Japan. Then not just credit but more spending will be needed. The announced European Recovery Fund of at least EUR 500 billion will certainly help equilibrate the balance in the coming months, supporting the V-shaped economic recovery in Europe.
The health of property companies
Real estate companies earned valuable experience during previous crises. In the last decade, most companies have made large efforts to improve their debt profile, extending their debt maturity, reducing leverage, increasing the relative proportion of the non-current liabilities and reducing the proportion of floating rate debt. In fact, in the last few months, several companies have actively raised more capital (EUR 8.2 billion in debt and EUR 2.3 billion in equity up until June 20, 2020)[3].
In sharp contrast to GFC, they are not motivated by debt covenants or liquidity stress but by expansion plans and acquisitions. It seems that many landlords are looking at the current crisis as an opportunity rather than a threat.
Impact on property sectors
The COVID-19 crisis has had different effects across the property sectors; some are more resilient to the effects of this crisis and might actually be boosted in the coming years by the changes the virus has brought into our lives. Then, it is likely to see sectors such as industrial, healthcare and self-storage coming to pre-crisis levels in the coming months, while some others will face a much longer recovery.
Industrial and logistics is one sector benefitting from the current situation. This segment of the industry has been expanding its operations to accommodate the increased demand for e-commerce services, transforming and expanding warehouse operations in an effort to adapt to new and reshaped supply chains.
On the other hand, lodging and resorts could face some challenging years ahead since tourism looks set to undergo major change. Retail is likely to be one of the most affected, although non-discretionary stores and supermarkets are currently benefitting.
Residential remains resilient, although this may soon give way to increased lease defaults as government job retention schemes are wound down.  In the long run, increased home-working may dampen urbanisation rates and slow down associated growth of housing demand in major cities, also affecting demand for office space, although there is space for a potential offset as public health concerns demand greater square footage per person.
In healthcare, the outlook remains positive with governments viewing the sector as essential infrastructure and public opinion demanding more investment into it. Finally, self-storage could face a slower expansion following a lower urbanisation rate, although the sector remains undersupplied with a positive medium-term outlook.
When looking at the economic environment and the health of the property companies, the sector as a whole has a promising outlook for the coming years. It opens new opportunities for investors that would like to increase their exposure to an asset class that certainly enhances portfolio diversification under any economic scenario[4].
[1] Available for all EPRA members here: https://www.epra.com/research/market-research
[2] Oxford Economics expects GDP in Western Europe to have contracted over 10% in H1 2020.
[3] Source: EPRA Monthly LTV Monitor. Data by S&P Global.
[4] Listed Real Estate in a multi-asset portfolio: A European perspective. Oxford Economics. (2019)
Source: Oxford Economics