Real estate markets set for a roller-coaster ride as COVID-19 wreaks havoc
Chris Graham, consulting partner with specialist real estate consultancy Esrar
RIYADH — Driven by market uncertainty, quarantine and border closures, many real estate markets are bracing themselves for a hiatus in transaction volumes which, in some, have dropped by 90 percent, said Chris Graham, consulting partner with specialist real estate consultancy Esrar and author of a leading report on branded residences.
The IMF warns that the world faces its worst recession since the Great Depression, expecting the global economy to shrink by 3 percent this year rather than expand by 3.3 percent as it predicted in January. Half of the world’s population is on lockdown. Market indexes fell by up to 35 percent. Unemployment is soaring. Businesses are filing for bankruptcy; few will emerge unscathed; many will not emerge at all.
No economic modeling could ever plan for such an eventuality and there can be no doubt that global real estate will feel the impact - just how much will vary according to the fundamentals in each location, Graham opined. While many countries remain in lockdown, the long-term impact is yet to be seen and forecasters talk about waiting until Q3 2020 before meaningfully being able assess the full extent of the damage, he noted.
JLL reported that "the further the outbreak widens and the longer it persists, the greater the chance of a more prolonged impact on the global economy and, by extension, real estate markets,’ noting that "the exact trajectory of the outbreak and the resulting economic effect is unknowable."
Looking back at the SARS pandemic, research by Zillow found that although a decline in transactions is immediate and severe, it appears to be short-lived; the data suggests it might only take up to six months or so for volumes to return to normal levels. Some experts believe that this will be the case in Saudi Arabia.
A recent report by Savills on the impact of COVID-19 predicts that any disruption to real estate markets ‘is likely to be a near term delay or a knee-jerk reaction, rather than a fundamental downturn over the long term,’ adding that ‘the introduction of a stimulus package by the Central Bank will be a shot-in-the arm to the property market in the medium-to-long term.’ Of course, the market fundamentals in the Kingdom are unique; seeking to boost home ownership to 70 percent by 2030 the Saudi government is proactively supporting real estate as a key driver for diversifying the economy, as well as meeting the needs of a growing population, so both supply and demand are set to expand.
Graham further forcast that as social distancing continues, sales of residential property (especially overseas) and prices will fall. The real estate sales agency model, in which an agent accompanies a potential purchaser to a viewing, is suspended as activity moves online, with virtual tours and other technology replacing physical viewings.
He said that as online sales launches become more common, developers will have to adapt their marketing (a recent launch in Singapore saw 77 apartments sold virtually). However, these are no substitute for real visits.
Meanwhile, few developers can afford to sit on their inventory and wait until the market picks up. While confidence has certainly been knocked, there is the realization that life will go on and developers are using this downtime to prepare post-COVID strategies, Graham indicated.
With global investment markets taking a hammering, many experts believe that investors will turn to real estate as a relatively stable asset class — “a flight to quality and safety”. There will be downward pressure on residential real estate prices in the short- to mid-term (especially in oversupplied markets) and, while forecasts vary, prices could fall between 10-15 percent.
However, lower prices create attractive buying opportunities which, in turn, drive up transaction volumes, restore confidence and help to stabilize markets. Many buyers will prefer to wait until stability returns to the markets, but others will recognize that there are good deals to be negotiated in the short to mid-term; indeed, those that are motivated to take advantage of this situation will likely seek to play competitive developments against one another in order to secure the best deal.
Although branded residences sell at an average 30 percent premium over non-branded units, they are expected to perform well in a ‘flight to quality’ (especially in established destinations) and will continue to be seen as an investment that holds relative value and delivers higher yields. Additionally, the many lifestyle benefits that they offer to buyers won’t diminish in appeal. As with all markets it comes down to supply and demand, but any significant swings in terms of sentiment and market share for this sector are unlikely.
Will this crisis affect the balance in the relationship between operator brands, real estate developers and purchasers? It is always risky to generalize as every project is different, but fundamentally each will need to adapt according to the demands of the local environment, while ensuring that the benefits for all parties remain, Graham noted. As in any long-term partnership, success is built on mutual respect between the developer and the hotel operator, and an understanding of the latter’s brand ethos and core values. To deliver a successful project and achieve a “win-win-win” situation, they must pull in the same direction, he pointed out.
Over 50 percent of new hotel branded resort projects now have a residential component, so investors/developers are selecting brands not simply on their hotel operating credentials, but increasingly on their residential track records and expertise.
Additionally, there is growing competition from non-hospitality brands licensing their names to luxury residences — which is why there is increasing focus on professional marketing, to ensure that the lifestyle and investment benefits offered by a branded development over its competitors are communicated effectively to buyers.
Finally, another unknown factor to consider is airlift, Graham said. The outlook for global airlines is fairly bleak, with many airlines making massive redundancies and others seeking government bailouts.
Fewer airlines mean reduced airlift into numerous destinations, so ticket prices are likely to increase. Additionally, the requirement of social distancing (which, for example, has proposed the removal of middle seats) would reduce capacity and therefore add further to the cost.
Then there are the environmental taxes on flights that have already pushed prices skywards, as well as the cost and hassle of additional hygiene requirements at airports. All these could impact real estate markets (notably buyers of overseas homes), as the cost of flying a family to a far-flung destination home 2-3 times a year would increase significantly.
Furthermore, "we may see a growing environmental stigma associated with ‘unnecessary’ long-haul travel," Graham said.
"As such, people may begin to look at buying second homes in closer destinations, while developers must seek ways to ensure that their resorts offer carbon/pollution offsets to negate the impact for increasingly environmentally conscious travelers," he added. — SG