Lenders give covid-19 vaccine a cautious welcome

Property debt providers remain circumspect about market prospects, arguing a rollout will take time and that some sectors may not recover fully.

The news that an effective vaccine for the coronavirus could be close have given real estate investors and lenders hope that the sectors worst-hit by the pandemic will begin to recover in 2021.

On 16 November, US biotech group Moderna said its vaccine had more than 94.5 percent efficacy in clinical trials, a week after Pfizer and Germany’s BioNTech said its vaccine was proving to be 90 percent effective. The announcement by Pfizer and BioNTech, on 9 November, led stocks from troubled property sectors to start recovering.

InterContinental Hotel Group’s share price gained 10.90 percent, while shares in London office landlord Great Portland Estates increased by 10.49 percent. European retail giant Unibail-Rodamco-Westfield saw its stock rise 21.13 percent.

The reaction from Europe’s real estate lending community has been more measured than that of public markets, some lenders tell Real Estate Capital. However, most agree it is far too early to rush into any changes in strategy.

As Assem El Alami, head of real estate finance at German bank Berlin Hyp, puts it: “The vaccine announcements are obviously good news for the sector but, for the time being, since it is still unclear how quickly and how efficiently a vaccine could be distributed to the population across Europe, we are reluctant to draw any conclusions. It is still to be seen how a viable vaccine could improve current economic outlooks and how that would play out in the real estate market.”

No panacea

Christian Janssen, head of the European property debt business at investment manager Nuveen Real Estate, is also cautious about the market’s prospects: “I don’t think we’ll have a V-shaped recovery,” he says. “The indications are there is a degree of polarising bifurcation – what has been described as a K-shaped recovery.

Janssen: “There is a danger a portion of the market does not come back to its former peak, maybe ever, such as business travel”

“Large parts of the market won’t return to their peak for a long time. I think people will go back to their offices and I doubt tenant requirements will shrink significantly. I also think parts of the retail market could have significant upside from their current position. However, I’m not so sure hotels will recover quickly. There is a danger a portion of the market does not come back to its former peak, maybe ever, such as business travel.”

Although lenders do not expect a uniform rate of recovery across all parts of the market, some senior lenders to core real estate are convinced even a partial return to pre-pandemic life will boost key sectors.

Shields: “If the pandemic were to go on for 18 months, it would be very difficult to assess market rents and values”

In the retail space, a vaccine could normalise footfall for higher quality assets, argues Michael Shields, EMEA head of real estate at Dutch bank ING. “If the pandemic were to go on for 18 months, it would be very difficult to assess market rents and values,” he says. “This news provides light at the end of the tunnel.

“It could also bring some certainty to the office sector. People are getting sick of working at home, and the prospect of a return to normality means companies will think twice about giving up lots of space.”

Investor capital

Martin: “The vaccine announcements may jump-start a new phase in the real estate cycle”

One strategist from the private real estate investment industry believes a workable vaccine would bring some certainty back to property markets. Simon Martin, head of investment strategy and research at manager Tristan Capital Partners, says the vaccine announcements may “jump-start a new phase in the real estate cycle as investors will see the ‘Great Unlock’ as a catalyst for cyclical recovery and continue to find themselves starved of yield in other asset classes”.

“You can’t underestimate the impact that capital flows from other asset classes will have in both the debt and equity space in our sector,” he continues. ”Even if just a small number of the world’s pension plans and insurers decide to look for another source of downside protection in their portfolios, the volumes into real estate could be really significant, particularly if investors start to worry about inflation risk.”

Martin believes a vaccine rollout in 2021 will lead to a rapid recovery in both real estate equity and debt markets. “We are not overborrowed, or over-built,” he says.

Wallace: “An economic recovery in 2021 would mean a return to capital growth in most sectors, with the exception of retail”

Simon Wallace, global co-head of real estate research and strategy at Frankfurt-based manager DWS, which has a property lending business, also believes more certainty in real estate will draw investors. He expects residential to appeal to them: “The high levels of occupancy, and the stable income returns residential investments can provide, can serve as a substitute to bond investments,” he explains.

Wallace says an economic recovery in 2021 would mean a return to capital growth in most sectors, with the exception of retail. “That, coupled with an increase in rent collection rates, would support appetite for lending.”

However, sources note that an economic recovery prompted by a successful vaccine could lead to inflation, which would prompt central bankers to tighten monetary policy. Nuveen’s Janssen says real estate lenders and investors should consider the longer-term prospect of interest rates rising if a vaccine is rolled out. “In periods of volatility, being lowly leveraged is important,” he says. “If rates go up, it will not be helpful for many borrowers and owners of real estate in the market.”

Continued caution

Assem El Amani
El Amani: “Once we see to what degree a vaccine has mitigated the pandemic’s economic effects, we could start reconsidering our conservative views”

Since the end of Q1, the covid-19 crisis has forced real estate lenders to become more risk-averse and focus on managing their existing loan portfolios. Our sources do not expect this to change overnight because of the vaccine announcements.

Plans to roll out a vaccine will not change Berlin Hyp’s conservative approach, says El Alami. In his view, an effective vaccine would not mean all the market’s economic issues had been resolved. “I would expect the rollout of the vaccine to take another six months,” he says. “Once we see to what degree a vaccine has mitigated the economic effects of the pandemic, we could start to reconsider our conservative views on real estate risks.”

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