Looking ahead after dire Europe GDP data

Real estate opportunists gear up as Europe’s Q2 GDP figures confirm dire forecasts

It was already plain in early April that that the second quarter of 2020 would be dire for economic activity world-wide. The first real evidence confirming those grim predictions is now starting to materialise.

Last Thursday, the US reported a Q2 GDP contraction of -9.5%. This equates to an annual rate of -32.9% and is the fastest decline on record.

Meanwhile, in Europe Germany’s Q2 GDP suffered a -10.1% fall; Italy, plunged -12.4%; France suffered its largest post-WWII contraction with GDP plunging -13.8%; while Spain’s GDP fell -18.5%, in the biggest fall across the eurozone. Italy’s fall was actually lighter than expected, but it had fallen prey to Covid-19 first in Europe and its economy was affected earliest.

The overall GDP fall across the EU during Q2 was -12.1%.

Although the UK is still to release its Q2 numbers some estimates expect its GDP to have fallen in excess of -15%.

Photo by Alec Favale on Unsplash

Now, the bulls say that what has been the worst quarter ever could be followed by the best quarter ever. But that outcome is dependent upon a number of factors.

These include the course of the pandemic and the development of effective vaccines and treatments; the speed and consistency with which governments can lift restrictions and the response of individuals and businesses to government initiatives.

It is of course also dependent upon the effectiveness of the policy response in protecting viable businesses and sustaining employment.

Already, unemployment rates are skyrocketting and banks are reporting significant losses, driven partly by hoarding provisions for expected loan defaults, both consumer and corporate. Lloyds, Barclays, Santander, HSBC and Natwest have all announced sizeable provisions for loan defaults.

These defaults are of course separate to the expected additional rate of default on state-backed coronoavrius loans.

In the UK, almost £50 billion worth of coronavirus loans have been issued, two thirds of which are the light-oversight Bounce Back Loan Scheme which requires companies to provide very little evidence to prove that they will be able to repay the loans.

The UK government’s Office for Budget Responsibility said that up to 40% of these loans could default. With the scheme still having four months left to run, lending under the scheme will rise considerably and with it, the total of loans at risk of default.

What does all this mean for real estate markets?

A list of companies that will probably default upon their loans would no doubt include occupiers and tenants of real estate, and in some cases real estate operators and managers.

We should expect to see more non-performing loans – which will include real estate, corporate and consumer loans – more tenant insolvencies, administrations, CVAs, forced M&A and distressed sales by private equity.

Inevitably, there is much talk about the ‘dry powder’ lurking on the sidelines. But much capital spending is governed by pre-defined investment strategies. To vary from these policies, funds have to either seek approval to expand their investment criteria or raise additional capital separately.

But in some cases that is happening. According to Bloomberg, Starwood Capital is looking to raise another $11 billion, comprising $8 billion for its flagship Starwood Global Opportunity Fund XII, and a further $3 billion for a so-called ‘sidecar fund’ earmarked for distressed opportunities.