Responses to the Commercial Real Estate Finance Council Europe’s Q2 2020 sentiment survey show a sharp deterioration in outlook among Europe’s property finance professionals as the covid-19 crisis plunged the sector into uncertainty.
The organisation’s previous survey, conducted between 2 January and 27 January in the wake of a long-anticipated UK general election, highlighted a clear note of optimism among its membership. However, the mood was to be short-lived.
With the covid-19 pandemic affecting all areas of the commercial real estate sector, respondents to the survey, which was conducted between 13 March and 3 April, had an overwhelmingly negative view of market conditions. A majority expect to see the availability of debt capital into Europe’s real estate markets decrease over the coming year.
The survey, conducted anonymously, was sent to up to three key contacts at each firm in the CREFC Europe membership. A wide range of lending strategies and lender types, as well as advisory roles, was represented.
The industry needs to think about scenario planning
Expert analysis by David Dahan, industry initiatives director at CREFC Europe
We conducted our Q2 sentiment survey when most of Europe was under lockdown. The optimistic sentiment pervading through the Q1 survey was replaced by a negative outlook. In the last quarter, only 3 percent of respondents felt UK market conditions were worse than during the previous quarter. By contrast, 96 percent believe they are worse in the Q2 survey. This is, by far, the bleakest result since the survey was initiated in early 2019.
The economic environment is a key concern – 87 percent of respondents think it is significantly worse than three months ago. They believe this is having a negative impact on real estate fundamentals and liquidity, areas that 83 percent and 82 percent of respondents, respectively, believe have deteriorated. A sharp reduction in debt availability is expected over the next year – 88 percent of participants expect less, compared with the 83 percent in Q1 who expected more. Judging by views on financial covenants, a substantial proportion of respondents are already concerned about credit quality.
Although it is difficult to see much transactional activity taking place over the next three months, the overwhelming consensus points to a retrenchment towards less risky assets, as participants see more attractive risk-adjusted returns at the lower end of the risk scale.
The short-term effects of covid-19 are clearly reflected in the results of the survey.
However, the medium- to longer-term impact is less clear. The virus has led to a unique experiment in which more than a third of the world’s population have been driven to live, work, study – and indeed socialise – in a very novel way. Over the next two quarters, the real estate financing industry will be focused on navigating through difficult times, but now may also be a good time to think about scenario planning.
For instance, will the trend towards urbanisation be slowed down or perhaps reversed? Will global supply chains be rethought? Will the evolution towards a more flexible office approach be accelerated? The changes covid-19 is bringing mean that the ‘day after’ will not be the same as the ‘day before’.