Real
estate must prepare for its most painful recession yet, with the International
Monetary Fund warning that the global economy is entering the worst downturn
since the Great Depression.
The IMF expects the
global economy to contract by 3% this year, as the coronavirus pandemic
triggers a “crisis like no other”. The loss to global GDP over the next two
years could reach $9tn (£7.7tn), greater than the economies of Japan and
Germany combined.
Real estate’s ability
to withstand the crisis will be put to the test like never before.
The consensus among
industry leaders is that real estate companies will enter the recession with
far better balance sheets than they had at the start of the financial crisis,
after which many companies took steps to reduce debt levels and gearings,
allowing them to absorb more valuation declines.
Helen Gordon, chief
executive of Grainger, said she had also never seen the government so engaged
with the industry. “The result of how you make yourself more resilient through
this will be a combination of state intervention and business confidence,” she
said.
However, Prestbury
Investments’ Nick Leslau reckoned that early forecasts of a v-shaped recovery
were “wildly optimistic”.
“I am naturally a
positive person and would like to think things can return to normal sooner
rather than later, but to profoundly believe that, I fear, ignores the reality
that post Covid-19 we will all feel battle scarred, anxious, poorer, maybe
unemployed and certainly without the bonuses we relied upon, and our desire and
ability to spend our way out of this will be significantly diminished both
personally and corporately,” he said.
“That is, of course,
before working out the cost to society of reducing the unprecedented levels of
peacetime debt building up at the moment.”
Leslau added that
every business must focus now “on liquidity and its preservation, as none of us
know how long this will last”.
“Many businesses,
especially those with high operational leverage, will need to ensure they build
the very longest survival runway for themselves, often by making very tough
early decisions, to ensure the threat for them is not an existential one.”
British Land chief
executive Chris Grigg urged companies to be flexible in how they deal with
growing uncertainty.
“People start asking,
is this a w-shaped, v- or u-shaped recovery, whatever. The truth is, at a time
like this you should hold your views with greater scepticism than usual,” he
said. “It is bold and foolish to subscribe to one view strongly.”
Grigg said more time
should be spent on planning for a range of scenarios. Having a three- or
four-stage model – broken down into managing the near term, the situation
during lockdown, recovery post-lockdown, and the longer term conclusion – is a
methodology that will help.
He added: “For the
first time since the Great Depression, governments around the world are actively
trying to slow their economies down. Trying to figure out the consequences of
this is hard. It doesn’t matter how experienced you are – this bit is new
territory.”
Industry leaders agree
this next recession will, like previous ones, accelerate trends occurring in
every subsector, as strategic decisions will need to be made quicker.
Andrew Jones, chief
executive of LondonMetric, said: “The trend towards convenience food retailing
or e-commerce has been clear for many years. They have not only navigated this
unprecedented period of disruption successfully, but thrived and enhanced their
propositions.
“The impact on yields
across the sector will be stratospheric, with the winners enjoying significant
compression and the most vulnerable weathering material outward movements.
“If you have the wrong
portfolio mix today, you could be in real trouble. However, sympathies in
physical retail will be thin [for several sectors] as there were plenty of
warning signs.”
For Allan Lockhart,
chief executive of NewRiver REIT, ensuring portfolios are positioned
accordingly will be critical. “Take retail – obviously recession will impact
consumer spending, which will have more of an impact on discretionary
spending,” he said.
Johnny Sandelson,
chief executive at developer Auriens, will be among those rebalancing their
focus. “For my own business in senior housing, the emphasis is going to be
changing now,” he said. “It will be as much about medical security as it is
about hospitality. We are going to want to be able to say we have the safest
buildings to look after our elderly. You can’t be pandemic-proof, but you can
make sure you have safeguards.”
Sandelson added: “On
one side we are feeling optimistic that a light will be shone on our sector.
But, there is no doubt that everyone is going to be affected economically.”
For Tim Heatley,
co-founder of Manchester-based Capital & Centric, the importance of pulling
together during a recession should not be downplayed, even if it means helping
rivals.
“People understand
that everything is connected much more than they did the last time around,”
Heatley explained. “There is a global responsibility, national responsibility,
regional responsibility and an industry responsibility to ensure that we don’t
all just lock the doors, as this will be just like a boomerang and crack us all
on the back of the head.
“We need to continue
to keep lines of communication open, be patient, help people out where we can,
even helping out competitors to keep things moving and liquidity going as it
will help us all.”