IMPACT OF COVID-19 ON GLOBAL REAL ESTATE INDUSTRY
Walid Moussa - World President of International Real Estate Federation FIABCI
I would like to start by saying that the sudden outbreak of the COVID-19 virus surprised us all. No one was prepared for this specific situation – not the healthcare system, not the economy, and not the political circles. No one was prepared for such a situation. Even today, we do not know what the true situation is. Every day we hear a different story about what could happen next, but we still don’t know how all of this will end.
What is certain, is that a lot of changes will happen. The economic impact will be significant. The good news is that, in my opinion, thereal estate sector will be less affected than others. There will be a certain impact, we will see a drop in prices and changes in the market, but if we compare it with what is happening on the capital market and the stock exchanges – the crash that has seen the market in the United States decline by more than 50 percent – the real estate sector will be in the best position in relative terms, because this sector deals with something that is real – your investment is not attached to fictional assets, but to real property. People come and go, but property, land and real estate remains. Thus, real estate will once again prove that it is best placed to deal with such a difficult situation.
However, I would like to re-emphasise that we will have a crisis, and we will see a drop in prices in the real estate sector too. The name of the game is how long this process will last. The impact of COVID-19 will be different depending on whether the epidemic continues for two months, four months, six months or a year. In terms of this impact, four months should not be seen as having double the effect of a two-month period: the effect could be four times worse. The impact is exponential, and if this situation continues for four months or more, it will pose great dangers.
The real estate sector is divided into different categories. Let us start with the hospitality sector. It was the first one to be affected by the current crisis – events have been cancelled, and hotels are closing. Those that are still operating, are losing 80% of their income, as occupancy is very low. Some hotels do not have the manpower to continue operating, even if they have the intention of doing so. They need people to manage the property and to work, but they have problems with finding such people.
In the long run, I can see the hotel industry having to start working more in the direction of internal tourism. People will not start flying and travelling right away, even if the crisis was to end in, say, a month. People will not resume travelling any time soon. Air travel will not go back to normal, and people will not have the same habits as before. So, from now on, we in the hotel sector need to start thinking about the ways to increase internal tourism and create relevant activities – at least until the situation changes and the world opens up again. We ask the hotels to start thinking more about internal tourism.
Let us turn to the retail market and the restaurant category. But before that, I would also like to address the issue of Airbnb, which is facing huge problems. A lot of strategies are currently being studied by Airbnb to see how they can get out of this situation. Clients are complaining about the lack of reservations, even though it is not the fault of Airbnb that people are no longer making reservations. At the same time, some people have carried out investment that is dependent on income from Airbnb and similar platforms. Airbnb had in mind to try to compensate and help their users, but I think that this will be a long crisis, and there is no way of providing compensation. As a result, we may see apartments that were used for short-term rentals revert to traditional, longer-term rental. In short, Airbnb and similar platforms are badly affected by the current events, and we will have to use apartments for long-term rentals until the crisis passes.
As for the retail market, all goods other than necessities will suffer for two reasons. In the current climate, we will not be buying luxury brands. Our focus will be on necessities such as food and medicine instead of Chanel bags for the women, or similar luxury items for men. Just food and necessities, until we can get out of the current situation. So, the luxury market will take a big hit, and everything related to branded products will be problematic. To give you an example from the United States, Cheesecake Factory have notified their landlords that starting from April, they will not be able to pay rent for their properties. In another case that I read about yesterday, tenants of the Grand Central Terminal in New York have signed a petition to also stop paying rent from April.
So, what to do? This is a big problem, because on the one hand, owners and landlords are looking to receive their income. Some of them do not have any financing available to them. However, landlords have a big part to play in helping their tenants in the current crisis. We cannot ask everything from the government.
The government will have to come up with special legislation, but we are in a global crisis, and the situation is very delicate. A week ago, the head of United Nations declared that this is the worst crisis facing the UN since its establishment in the 1940s. I don’t want to be negative, but we need to be realistic. We as humans have a role to play in helping each other and seeing how we can get out of this situation together. Landlords need to keep in mind that they also have a big role to play, rather than wait for the government to compensate them. The government is unlikely to have the means to compensate everyone, and I am afraid of seeing many countries go bankrupt as a result of this crisis. Right now, governments are saying that they will inject money into business, loans and other areas, but we all know what can happen in the end. If we look at Italy, we know that it has huge debts to the World Bank and others. Will it be able to pay back the loans after the crisis?
So, the health crisis will be followed by the bigger economic crisis. We are all parts of one chain, and if we do not play our roles, then we are all going to fall. That is why I am emphasising the role of the landlords and owners in ensuring that they help their tenants.
Who in the retail sector will benefit from this situation? As you can imagine, online sales will grow. In the United States, online retail was already a strong market, and big companies such as Walmart have had to close stores over the last few years as the online business grew in importance. Now, even in places such as my home country of Lebanon, we get a knock on our house door 2-3 times per day, as children’s toys, food and other necessities ordered online are being delivered to us. We are getting used to living online, and when the crisis is over, we will retain these habits. Why should we stop ordering things online when we can see how easy and fast this is? So, online retail is growing and taking advantage of the current situation, and this trend will continue after the crisis.
This brings us to the logistics market. What professionals should do is to prepare themselves. I have always said that ‘adaptation’ is a magic word. As a general rule, whoever adapts, will survive, and whoever stands still, will die on their feet.As professionals, we have to adapt. By logic, logistics will be an emerging market, as people will always need to store their goods before distributing them in various cities and countries.We need to study carefully how this market works, in order to develop it further and prepare for the post-crisis period.
Now let us turn to the office market, which I find very interesting, as we have been used to working in the same space. Over the last few years, the trend has been for everyone to work in front of each other in open spaces, which I do not particularly like. What will happen here? With regards to short-term rentals, the situation will be problematic, as all such leases will be cancelled. As for long-term rentals, companies will have to change and decrease their budgets to be able to survive the economic crisis. Tenants will try to move to smaller offices, or to renegotiate the current price.
As we discussed with the online retail market, people will get used to working from home. Companies will ask themselves if they really need to have 100 employees staying in an office. Instead, they will devise new strategies which will see 40 people remain in the office and the remaining 60 work from home. Why should the whole marketing team be working from an office? It works perfectly fine, as we can see right now: you are all in front of me, looking good. We are listening to each other, and we are sharing ideas. This works perfectly, as if we were in the same office. So, to summarise the future of the office market, people will have tighter budgets and will discover that it is possible for employees to work from home. Tenants will renegotiate prices and move to smaller spaces.
It will be interesting to see changes in the co-working concept that we saw develop in recent years. You know the picture that you used to see in a co-working space: a guy would be lying on a couch with his laptop, while someone else would be lying on the other side of the room, all working together in a pleasant environment. This is likely to stop for the time being. Once again, big companies will have to adapt in order to survive. In my opinion, they will do so by giving people in co-working spaces more independence while leaving some common areas for people to share if they wish to take the risk. This will not be the only option, but everyone will have the opportunity to get their own corner and protect it. This is more likely to happen as the crisis continues. If it were to extend until September, we will be subconsciously different by that time. People are afraid of each other, and will not get back on track as before.
This is an important moment in our history. Until recently, we believed that we as humans control the world with our advanced technologies and rapid means of communication. However, look at New York – one of the world’s largest cities, where life happened at a fast pace, and everything was possible. Now the situation there is a nightmare, and no one wants to be in that city anymore. I believe that if this crisis were to continue, then the concept of urbanism will change.We will get to a point when the way we design our cities will be different.It all depends on how much longer the crisis will continue for – will it be until May, July, August, September or next April? Time is an essential factor in the given issue. Let us hope that this will pass quickly, as there will be big problems otherwise.
In my opinion, the residential market – the category of people’s primary homes – will be less affected than the other real estate categories, as we discover that the safest place on EARTH IS AT HOME. We all want a home, and we will do everything possible to own that home. Therefore, the market of people’s primary homes (rather than vacation properties) will remain essential. However, I may also want to own a plane, but can I afford to? In the same way, will people be able to afford owning a home after the crisis? This is where we will see the emergence of affordable housing.I believe that after the crisis, the government will have to work hard on the concept of affordable houses, and create regulations (such as lowering taxes on construction materials and changing zonings) for every developer who starts working in this category.We are speaking here about real low-cost housing, rather than simply offering discounts.This is an emerging market, and I would advise real estate professionals to prepare themselves for its emergence – start studying how the concept works, and how we can develop it.
Thus, in my opinion, two of the markets to focus on after the crisis are logistics and affordable housing.Then there is also the luxury housing category: in every country, there will still be people who have money and who will wait until the right moment to invest. To take my own neighbourhood as an example – I live in a nice area, where I was used to the price of real estate being $3000 per m2. However, over the past few years, it increased to $5000 per m2. Even if I had the possibility, I would not be prepared mentally to buy a home at this price, as I am used to paying a lower amount. Therefore, as prices will fall, we will see a lot of investment from people inside the country. Prepare yourselves to catch these local investors with the right offers. There will always be people from the local community waiting for the right moment when prices fall. On this occasion, this will be due to the coronavirus, but this scenario happens all the time, even if every cycle is different.
Other categories worth mentioning include student housing, which I believe will be affected and not yield the same returns. Nothing is dearer to us than our children, so come August, will we still send them to live with four other people in the same property? We do not know the answer, I suppose. This category will also need to adapt and change the system. It will affect the income, because as you know, student housing was designed to have higher income than many other products.
If the co-living and co-working concepts are to continue to exist, they will need to change and adapt.
So, this is the quick way to analyse and discuss the various market categories. I have mentioned the luxury market, which needs to catch the local investors. I mentioned the logistics business for online retail, and affordable housing for people who really want to have their own home and feel safe. For the time being, those are my three main advices for the current situation.The magic word for me is adaptation. We need to adapt, even mentally. I have mentally prepared myself for staying at home for months. I have to keep my morale high. What do I do at this time? I brainstorm, I talk to people like you, I think about the future. What could be waiting for us? What is our Plan B and Plan C?
Focus on your work and your future. For example, professionals who did not have time to renew their marketing tools, to work on social media or to change their website, can now do so. Brokers who did not have time to renew their listings, can now do so. Go through the list of properties you have for rent or for sale, and update them. Think about innovative ideas and technologies.
Keep up your morale.Think hard about our future. You have no other option.
Finally, it is very important to point out that this is not a local issue, so do not blame yourselves or your governments. It is a pandemic – a global crisis. What is needed are good measures from our government and our public sector.