Erfurt Shops have to close, trade fairs are canceled, rows of office workers are ordered to their home offices, industrial production sites are shut down, thousands of people are sent in short-time work – it is becoming increasingly clear that the economic consequences will also affect the real estate world as a result of the corona crisis. It is difficult to assess the concrete consequences. Nevertheless, the industry could even benefit from the crisis.
The consequences are most evident in retail properties. In many countries, including Germany, governments have ordered most of the shops to close. Stefan Genth, the managing director of the HDE dealer association, estimates that non-food retailers lose EUR 1.15 billion a day. In three to four weeks there could be bankruptcies, he says in an interview with the “Frankfurter Allgemeine Zeitung”.
The owners of the commercial real estate must also adjust to this. Earlier this week, Unibail-Rodamco-Westfield (URW), Europe’s largest shopping center operator, issued a message to its investors. The group is in dialogue with its tenants. But at the moment it is still too early to see the consequences for your own business. URW has property assets of EUR 66 billion. The share has lost two thirds of its value since the beginning of the year.
The SDax company German Euroshop wants to cut the dividend as a precaution. The share has lost 60 percent of its value since the beginning of the year. Shopping center operators are also feeling the loss of sales at retailers. Rents that are linked to sales are common in this area. “There is often a basic rent plus a share of the success in sales,” explains Birger Ehrenberg, CEO of the Federal Association of Real Estate Investment Experts (BIIS). The owners could cope with the temporary loss of rent, says Ehrenberg. “The real risk is bankruptcy of the dealers,” he says.
Retail owners had previously suffered. This is shown by the current ZIA-IW Real Estate Mood Index (ISI): At the beginning of the year, the situation fell by 30 points to only 65 points. Overall, the barometer ranges from minus 100 to plus 100 points. The mood has probably deteriorated further.
How quickly the situation is changing is also felt by Hans Volkert Volckens, Head of Real Estate at KPMG. The industry was still negotiating deals two weeks ago. But now the requests from clients for support in the crisis have increased significantly. Volckens urges prudence. “The companies now have to soberly analyze their portfolio and tenant structure, assess possible rental losses and weigh up their own financial risks overall,” says Volckens. The need for advice in the hotel sector is now “intensive”. This is often about securing liquidity in the company. That is what the Reutlingen hotelier Hans Joachim Neveling demands. He operates five hotels in Baden-Württemberg, two of which he has already closed temporarily, and short-time work applies to three properties. In his Reutlingen hotel, he otherwise has 95 percent business travelers. Of the 160 rooms there, twelve were still occupied.
Deals under pressure
According to media reports, the Bavarian Chamber of Supply has imposed a stop of at least four to six weeks for investment decisions in the real estate sector. Deals will continue to be reported. In most cases, however, these were threaded in before the corona crisis. In the background, investors explain that new business is often severely hampered. “Visits no longer take place,” says an insider.
In addition, legal uncertainty is spreading on the real estate market: what happens if a tenant can no longer pay rent due to the crisis? The German Tenants’ Association and the GdW have called for an aid fund to protect tenants and landlords against potential loss of rent if tenants struggle with lost income. Vonovia and German living, the two largest landlords in Germany, have declared that they will support their tenants. Lawyers such as Julia Haas, partner and real estate law specialist at the Freshfields Bruckhaus Deringer law firm in Frankfurt are also feeling the increasing need for advice from tenants and owners. “Our clients are primarily concerned with the topic of rent reduction,” says Haas. For example, the question arises whether tenants can reduce the rent due to a lack of rent or a disruption in the business situation. There is no general answer. “In principle, however, the use risk of the property lies with the tenant,” explains Haas. That means: If the operation is restricted by official requirements, this is initially a problem for the tenant, not the landlord. However, it could become a landlord problem if the building becomes unusable due to certain property-related defects. At the moment, however, it can also be seen that landlords and tenants agree on the question of rent payments in order to cushion emergencies. The city of Hamburg has instructed its real estate companies to offer commercial tenants a three-month delay in rent payments if necessary. “In the private sector, rent deferrals are also agreed where it appears necessary,” says Haas.
Even with Gerhard Molt, specialist lawyer for tenancy and residential property law at the law firm Eversheds Sutherland, “the phones are running hot”. In addition to tenant rights issues, building contractors face challenges: Molt says there are already significant disruptions on almost all major construction sites. Skilled workers from the Czech Republic, Poland, Italy and many other countries can no longer enter the country, and there are sometimes supply difficulties with special components. “You will have to look closely at the delays and additional costs that are actually caused by the corona crisis and which problems actually have other causes,” says Molt.
In return, the expert Ehrenberg does not expect abrupt price drops in property valuations. This is good news for private investors who have invested their money in open-ended real estate funds, for example. “Real estate is not valued on the stock exchanges like stocks on a daily basis, but rather sustainably and on fixed deadlines,” says Ehrenberg. This leaves room for hope: If the spread of the corona virus can be curbed, the consequences for property values could remain manageable.
In case of doubt, the real estate market could also benefit from the crisis: central banks have lowered their interest rates and relaxed monetary policy. Until the very end, this was the basis for the real estate boom. “Once the current state of shock is over, it is likely that demand will pick up in many real estate segments,” said Ehrenberg.
More: Six things the ECB wants to calm the financial markets with.