Investment market troubled by various unknowns

Economic crisis and rescue packages:

Austria, Europe and the world are currently facing an unprecedented situation. The lockdown due to the corona pandemic, affecting around a third of the world's population, and the ensuing widespread economic standstill have led to a massive global economic downturn. At the same time, the threat of recession is being countered by unprecedented political and economic countermeasures. “The US has passed the CARES Act, an economic aid package worth USD 2 trillion (2,000,000,000,000), or around 10.5% of the gross national product. And Austria has taken a leading role in Europe by consistently implementing security measures and economic aid for companies at an early stage”, says Christoph Lukaschek, MBA, MRICS, Head of Investment at Otto Immobilien.
 
He adds that the Asian countries first hit by the crisis and some European countries are already relaxing restrictions and transitioning to the ‘new normal’. The stock markets have also eased up and have been able to recover, at least in part, from their initial dramatic losses thanks to the implementation of aid packages for the economy. Lukaschek finds the recurring comparison to the 2008 global financial crisis inappropriate with regard to parameters such as (under)capitalised banks, mature credit lines and an oversupply of real estate. “Rates that were globally extremely low before the crisis due to the massive availability of capital have so far been stable, and the ten-year government bonds of many economies are close to the historic low”, says Lukaschek, who still describes the development of the economy over the medium term as “uncertain.”

Austrian investment market: 75 per cent decline

The effects of the corona crisis on both the (world) economy and the real estate markets remain uncertain. The global lockdown already brought many transactions to a standstill during the first quarter. “Transaction volumes in the Asia-Pacific region declined by 80 per cent in some cases compared to the first quarter of the previous year*”, says the investment expert. The decline was less dramatic in Europe. In Austria, for example, the transaction volume declined by 75 per cent, although it should be noted that the first quarter of 2019 was the strongest start to the year ever recorded.

“Despite operational restrictions, several large-scale and transactions that were already well underway were completed in the first quarter of this year, but a decline is expected in the second quarter”, says Lukaschek.

However, given that capital remains highly available, many investors are still looking for suitable products. Although most transactions are on hold for operational reasons, purchase cancellations are currently the exception on the Austrian market. “Interest rates are still extremely low on risk-free investments and the turbulence in the stock markets could flush even more money into the real estate markets in the medium term”, says Lukaschek.
 
At the same time, there is still a low supply in the face of demand. Since tenants, landlords and banks have been very much willing to cooperate and negotiate, emergency sales due to rental losses have not been reported.

 

Unlike the 2008 financial crisis, there are currently no significant outflows of funds in the open-ended real estate funds and none are expected, given the changes in regulations. “Investors have clearly different strategies in terms of how potential price adjustments are handled in individual asset classes. Some are behaving cautiously at the moment, while others see an opportunity to get ahead in an environment with fewer competitors”, explains Lukaschek.

Financing: Investors with equity have the advantage

According to Lukaschek, the biggest variables in the investment market are currently the lending trend and the medium-term margin trend for the banks. Even if they continue to maintain sufficient capital resources, a certain price increase may be expected in view of existing economic risks and potential regulatory requirements. “This is still very low at the moment, at least in Austria”, says Lukaschek. Investors with a high share of equity therefore have a clear advantage – there are enough of them on the market, at least in the core segment. 

Favourable situation for Austria

International investors, especially from Germany, have been responsible for up to 65 per cent of the property transaction volume in Austria in recent years. “Since we can now assume that travel restrictions will be relaxed in the medium term, at least on the Austrian side, a significant decline in the transaction volume is not to be expected”, says Lukaschek. Austria's successful handling of the Corona crisis has ultimately led to increased interest.

Lukaschek believes that “international investors are more likely to shift their regional strategy in favour of Austria.” And there will also be displacements between the asset classes. He claims that, as with all crises, most investors are currently seeking a safe haven and are therefore focusing on both long-term leased core properties with stable commercial tenants, in order to minimise potential failure risks, and residential properties as a safe asset class.

Residential properties: a ‘safe haven’

Until now, the current situation has had little or no impact on the rental or investment markets in the residential asset class. "Residential properties in good locations with indexed rents are traditionally a safe haven in times of crisis”, says investment consultant Georg Kretschmer, MSc, MRICS. He expects that many investors will shift their strategy towards this asset class and that it will see increased inflows of capital. “The first transactions will likely take place very soon. This is because the basic need for (affordable) housing depends more on demographic developments than on short-term economic fluctuations”, explains Kretschmer. A downturn in the rental market is only to be expected in the event of a longer-term rise in unemployment in Austria. “But the latest studies have not indicated this”, says Kretschmer.

Major differences in commercial properties

In the commercial real estate market, there are major differences between the individual asset classes, according to the experts at Otto Immobilien. Property owners have had very mixed experiences in recent months in terms of whether they are financially and legally able to claim rent that is due to them.

Logistics is the winner in the crisis

Although some tenants have also requested rent deferrals  – or ‘rent holidays’ – and exemptions in this asset class, logistics properties are currently considered one of the winners in the crisis. This is due on the one hand to the double-digit growth of individual online retailers, which has led to an increased demand for storage and distribution space, and increased demand from local suppliers on the other hand. “Our assumption is that returns tend to be under pressure due to increased demand from investors. Whether this trend will be overcompensated by potentially higher financing costs cannot be foreseen at this time”, says Lukaschek.

Diverse office market

The trends in the office asset class are much more diverse. “The world's most extensive work-from-home experiment in history is currently underway, and yet this is precisely what illustrates the importance of the workplace as a social hub and a place for gathering and being creative”, says Lukaschek. Major international tenants in particular have requested rent reductions, some of them quite significant, which have to some extent no legal or economic basis and depend on the goodwill of the lessor, as is also the case in the logistics sector. However, he believes that “rental performance will be significantly lower than in previous years due to the fact that expansions have been suspended at most sites.”

Long-term leased properties are currently in demand among investors. On the one hand, they have a yield advantage over risk-free investment forms such as government bonds; on the other hand, they do not require rental activities in the medium term considering that the market trend is difficult to assess. As for office properties affected or threatened by increased vacancy, a lower transaction volume can be expected for the moment, given the reluctance of potential sellers to expose their properties to the current uncertainty of the market.

Retail risk case

“The retail asset class is definitely one the hardest-hit areas of the real estate industry”, says Lukaschek. For one thing, shop closures in nearly all countries have caused consumption to shift even more towards the already booming online trade, while the loss of rent due to rent exemptions, turnover rents and bankruptcies will change the way investors view this asset class for some time to come. “Foreign investors in particular were not aware of the legal regulations in Austria, which assigns the economic risk to the landlord in the event of an epidemic”, says Lukaschek. Although returns in this area will certainly continue to increase, it will likely take until 2021 for the price expectations of buyers and sellers to converge and for any transactions to take place.

* Hong Kong – 81%, Singapore – 72%, Asia-Pacific – 59%