Coronavirus: brick-and-mortar retailers will be second-hardest real estate sector hit

Paul Stewart and Philip Conner, European and US heads of real estate research at Barings respectively, wrote:

“Store-based retailers will be most directly exposed—after hotels—to the fallout, and in the near term will likely lose market share to online platforms. Whether this proves temporary or accelerates the ongoing shift toward non-store purchases is difficult to predict, but it clearly adds to the challenging environment facing brick-and-mortar stores.

“Demand for industrial and office space should be somewhat insulated near term, but we expect businesses and investors will retreat to the sidelines until the outlook for the economy is less uncertain. Leasing activity is expected to slow, but the bigger impact could be felt in the transaction market, where investors are likely to delay committing to new acquisitions.

“In Europe, the region’s export-orientated economy was already beginning to struggle on the back of rising global trade tensions. The problem is now amplified by the outbreak. Oxford Economics recently downgraded their GDP forecasts to just 0.8% for 2020, with the impact to be felt as soon as Q1. The most impacted real estate sectors will likely be those that are travel, tourism and trade orientated—hotels, serviced apartments, restaurants, leisure, sea and airport logistics immediately spring to mind; supply chain disruption will impact retail, should the crisis persist. But e-commerce might see a boost to the benefit of urban logistics operators, should consumption shift away from public spaces.”

Italy has suffered most in Europe, and Milan has suffered most in Italy. Milan was the first location in Europe were coronavirus reached. However, the downside impact on real estate is probably more limited because reduced property market transparency and liquidity tends to heavily insulate Italian property valuations from short-term macro volatility, says Stewart and Conner.

Paul Stewart and Philip Conner added:

“Germany, Sweden and the Netherlands are all export growth engines and exposed to the global economy. Should yet more QE arrive via the ECB, that has tended to be more supportive of the best ‘bond-like’ core real estate asset prices in the past, less so for secondary stock. Prime property yields could actually tighten even further across all the major European cities—probably ex retail assets where pricing looks soft across the board. Another possible under appreciated vulnerability, albeit a small one, could be Helsinki. While the Chinese travel numbers lag behind other larger European cities in sheer quantum, great efforts have been made in recent years to grow the location as hub for Asian travelers seeking streamlined European visa applications. Overnight and two-day stays are increasingly common, and thus hotel and retail might struggle in the coming weeks here.

“The commercial real estate sector is fortunate to some degree, in that property market fundamentals are generally healthy across most sectors and markets, and lower interest rates should help to support asset values and demand for cash-flowing assets. But in the near term we expect a flight to high quality, core properties.”

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