Vienna, April 1st, 2020 – the Corona virus is currently dominating worldwide news. Colliers International has summarized what this pandemic means for the Austrian real estate market and what effects can already be seen in the individual asset classes.
In the third week of the restrictions in Austria, there is still no real improvement in sight. Nationally and internationally, the situation changes practically every day. The hope is of course that the measures now in place will quickly take effect in all countries and limit the spread of the disease.
It is obvious that the situation has an economic impact, but how big this impact will be in diverse industries is not yet foreseeable. Today’s economy is a global network – international dependencies are now becoming particularly obvious and will have to be reconsidered in the future.
“It will now become clear that property is generally a relatively crisis-proof investment, and the apartment as a retreat has taken on new meaning in the past few days” says Thomas Belina, managing partner of Colliers.
“Analogous to other areas of the economy, our activities as service providers have decreased significantly during the last two weeks, but we think this is only a lull, and expect the market to pick up speed again soon. We will then be confronted with a period of increased activity, as we will have to cover the backlog of the market participants’ needs.”
Belina continues: "‘Contactless appointments are the order of the day, flexibility and creativity (with security continuing as top priority) are of the essence. The real estate industry will be one of the economic sectors that will best overcome the current crisis."
While transactions that are already well advanced (i.e. where site visits have already taken place or where there is a LOI) can be continued, most new transactions are on hold. The consequences of this incision, and their severity, will largely depend on the further course of the virus spread and the responding counteractive measures of the government, which makes them difficult to predict. In any case, concerns about future price adjustments are increasing.
In terms of asset classes, the corona crisis will have little, if any, impact on housing. Logistics is strengthened by strong e-commerce and the associated demand for additional space; long-term office leases (by tenants with good credit ratings – especially public tenants) will remain the focal point for investors. Generally speaking, the closer to the "core" a project is, the less need there will be for price adjustments. For retail properties (especially shopping centers) and hotels, however, there will certainly be price corrections.
Travel restrictions and quarantine measures will push most new sales activities beyond Q2 2020. We do not expect a full recovery until 2021.
Austria was a local market in the past, and Austrian and German investors still form its backbone. However, especially in the past 3 years, investors have become more international and diversified – we expect the market to remain attractive to new capital due to its stability and liquidity.
In the retail sector, the consequences of the corona virus lockdown are particularly severe: the temporary closure of the stationary retail trade and the entire catering and leisure sector heavily affect this market. The only exceptions to the state-mandated closure are shops for necessary daily needs, such as supermarkets or pharmacies. As a result of these measures, the retail trade suffers a daily loss of sales of currently approx. 46% (approx. EUR 117m) – up to EUR 700m per week.
Only a few rental contracts are currently being signed in the retail sector, but we have to assume that not all companies will survive this situation unscathed, and that numerous properties will become available after the crisis, which will bring movement into this market.
However, closed retail spaces do not only affect retailers; property owners are also currently suffering severe losses due to loss of rent and rent reductions.
According to § 1104 ABGB, no obligation to pay rent or lease interest can be upheld if the property in question is rendered useless by war or epidemic. Whether the resulting loss must really be borne entirely by property owners is unfortunately unclear at the present time.
Studies and reports from our branches in China show that even in an advanced stage of the crisis, companies hardly implement any expansion plans, but are instead focussed on maintaining their existing locations. We must therefore assume that there will be no major expansion projects in the medium term and that there will be a consolidation phase in the coming months.
However, the development of this global pandemic is also leading to creative solutions by individual retailers. For instance, there is a strong upward trend in e-commerce, and digital offers such as online sports courses or cooking classes are booming. The catering sector has responded as well, and many restaurants and retailers are now offering delivery services.
Like other sectors, the office market is still in a state of shock. Companies of all sizes are concentrating on stabilizing their core business. Most of the work has shifted to home office, so property visits and personal appointments are only possible to a limited extent, if at all. All location issues that are not absolutely necessary have been postponed indefinitely. Although there is no legal basis for this, many owners are also considering ways to reduce rental costs at short notice. We are already advising various tenants on measures that can be taken in this unique situation and have entered into a dialogue with various landlords about short and long-term solutions.
Further developments in this market will depend on the effect of the state-ordered measures: on the one hand, due to expected failures among tenants and an increase in the efficiency of rental space, an increase in the vacancy rate is to be expected. Some companies will also benefit from the knowledge that home office is a full-fledged alternative to working on site, which will in turn make hot desking models more attractive than they were before COVID-19. A higher vacancy rate also means better conditions for new rentals, but to which degree this prediction will become true depends on the development of the situation in general. Rental performance for the first quarter of 2020 is tending to a historical low, and there are no credible predictions for the second quarter as of now.
Long-term effects on business centers and shared office providers are also still unclear. Many operators offer very flexible models for renting, i.e. also very short and short-term termination options. It remains to be seen how many of their clients will now be pulling out, and whether some – especially SMEs – will not prefer the much cheaper home office option until the situation stabilizes. Large international corporations renting business center space is more common internationally than in Austria – but here, too, the flexibility given to users in terms of duration and termination of renting contracts could pose a serious vacancy issue for operators in the medium term.
Industry & Logistics Market
The current scenario of WIFO and IHS predicts a recession for Austria's economy. In this context, we expect a reduction in economic output of around 2.5 – 3.0% in relation to the GDP, combined with an increase in the unemployment rate to at least 8.5%. According to WIFO, a minus of 5.5% is expected for the 2020 budget deficit. Public debt would thus exceed the EU Maastricht criteria, which are currently suspended anyway. The current crisis also suggests that insolvency applications will grow by 20-25% as a best-case scenario.
Some positive news in this context:
The current structural trends indicate that logistics properties are resilient during this period and beyond. In our view, demand for most users of logistics real estate will increase, as many items that are essential for basic daily needs (such as food and beverages, consumer goods and medical care) are now all the more tied to the supply chain. In addition, there is the expanded logistical need of a decentralized and regional production chain, which is tasked with preventing supply bottlenecks (think China) by distributing the load among several and geographically varied producers.
For this modular and regional goods production and processing, industry 4.0-compliant equipment is a crucial precondition.
On the one hand, industrial modularization requires the industry to be more network-ready, and on the other hand, it necessitates uniform standards for buildings, so that the new requirements can be met flexibly.
City logistics will play an increasingly important role as a third pillar. Due to the increase in e-commerce, local distribution and logistics centers in metropolitan areas will rise in significance.
We currently predict three main areas of change:
- Increased stocks and regionalization lead to a greater demand for logistics space
- Diversification of production locations by relocating production to new, regional, decentralized modular locations
- Online trading will further increase its popularity among consumers, which will lead to higher consumer numbers
Overall, logistics is better positioned than other sectors, as long-term demand is potentially boosted by the necessity for increased inventory levels and a further rise in e-commerce.
In the past few weeks, and especially since the state-mandated lockdown has been implemented, demand in this segment has fallen sharply. Because moving to a new house is currently unreasonable, landlords are more willing to extend existing tenancies which are expiring in the near future (for instance through end of term) until further notice.
However, since there is (still) no legal basis for this, tenants are dependent on the good will of their landlords.
Experience shows that crises affect the housing market, but do not bring it to a standstill (consider the financial crisis of 2008 as an example).
People’s needs and living conditions are constantly changing, especially in times of crisis, and perhaps even more so shortly after.
A crisis like this is a tangible reminder that real estate preserves value. It is therefore possible that the property sector may also benefit from the upcoming changes. In any case, we are expecting a strong surge in demand as soon as the current government measures come to an end. The real estate market is subject to fluctuations and changes, but it plays an elementary role – on a personal level, by covering one’s own housing needs, and on an economical level, as an investment.
Due to the multitude of influences and the unpredictable nature of current (global) events, it is difficult for us to estimate these developments precisely.
We will revaluate the situation at regular intervals.