The Real Estate Clock jumped forward abruptly at Mid-March, anticipating the springtime change and transforming a growth phase into a phase of contraction and loss retainment. At Colliers we believe that the application of a roadmap for the reduction of uncertainty is not possible without previous experiences of confinements in developed countries but, instead, we can use our expertise to help mitigate its consequences.
The first idea that we are clear about, whether we like it or not, is the fact that since January in China and more abruptly since last week in the rest of the world, the economy and individual behaviours have changed, and we must all adapt to this. From a purely economic point of view, it seems clear that this situation of massive isolation, together with the already-existing trade crisis, will dramatically reduce global growth at least during 2020, and probably in the medium term. Therefore, the coming year will consist in a global recession, being the possibility of the developed economies returning to the growth path dependant on the economic measures to be adopted and their effects.
Regarding the financial and real estate world, the demand has completely frozen due to the highly uncertain atmosphere, being the investment decisions of both institutional funds and final customers in standby until they get a more clear picture of the true magnitude of this whole crisis. This fact, which has shaken all productive sectors, will surely block the economy in the coming months and will affect real estate in a very significant way. The hotel, residential, office and retail sectors will be directly affected by the prevention measures taken by the authorities (the latter with a higher risk of significant contraction due to their eminently procyclical behaviour). Additionally, it is also important to highlight that this period will be especially difficult for construction companies in our country, unable to afford extended interruptions on their activity due to their narrow margins and recent increases in raw material prices.
In these first moments of shock and paralysis, the priority is to secure cash and avoid bankruptcies, that is, neither sales (due to their drastic fall) nor the profit and loss account will be drivers in business decision-making. In fact, central governments and other organizations such as ECB, FED or private groups (i.e. Lazora, Via Célere, Metrovacesa) have taken measures to ensure liquidity in an agile way (delays in the payment of taxes or rents, reduction in social security contributions in temporary workforce suspensions, etc.). Unfortunately, these measures, focused on helping companies and vulnerable groups through short-term liquidity, do not ensure more consumption or more investment in the future, and therefore will hardly stimulate the economy. The key seems to lie in the measures that are yet to come, and which must be aimed at fuelling demand and reducing the tax burden, so that they directly affect not only the cash flow of companies and individuals, but also improve their profit and loss accounts.
In front of such an exceptional situation, the first question that arises is which criteria must be followed to resist this conjunctural crisis with the least possible damage. Our experience after shocks like 9/11 or the subprime mortgage crisis, has taught us that now is the time to streamline decision-making, to prioritize the short term, to make extremely detailed treasury plans for the coming months (and to update them on a weekly basis), to make efforts to monetize the working capital as much as possible, to reduce/renegotiate the costs that most penalize our income statement (whether fixed, variable or financial) and to share efforts among all those of us who make up the real estate market. Therefore, in the short term we will see renegotiations of contracts, refinancing and creation of contingency plans that will require elements already seen in the past and that can be summarized in several basic questions: rigour, prudence and realism from the financial point of view, and anticipation and deep specialization from the real estate point of view.
Once this initial shock is overcome, the resulting situation is less clear. Liquidity measures are correct to tackle an initial moment of difficulty, but if the problem lies within the value chain, all this liquidity will not budge the trend. It seems clear that the next few months are going to be of an extraordinary contraction and paralysis of the economy, however, the question is whether the recovery will start next year or if, on the contrary, it will deepen into a crisis similar to that of 2008. More precisely, what at this moment is at stake is whether the Real Estate Clock continues to move forward or whether it is possible to “turn back the Clock”, moving to a starting point similar to the last quarter of 2019.
Unfortunately, from Colliers we cannot guess the future, but our experience working in the real estate and financial sector during opposite phases of the cycle, leads us to consider a series of reflections that we hope can help in the decision-making of all economic agents.
On the one hand, the most likely scenario is that in a short period of time, demand will recover and we will return to a growth (or stabilization?) scenario similar to the one before this situation started. In other words, we would return relatively quickly to a healthy growth and manage to “turn back the hands of our Clock”. Then, it will be time to rethink the medium term by making alliances that improve the solvency and efficiency of the sector, innovate, invest and make ambitious business plans for the coming years. And probably at the same time, it will be an opportunity to reflect on whether, within our forecasts, we should also contemplate unexpected stress events such as that generated by COVID 19. In this scenario, our growth should persist, with somewhat less speed due to the increase in public debt and the protectionist global trade trend, but supported by current account surpluses, moderate private debt and sustainable real estate growth.
On an opposite side lies the scenario of frozen demand in the medium term due to an increase in unemployment, which cannot be disregarded. This would be the result of the expected fall by 6% in Spanish annual GDP for 2020 (in 2009 it fell 3.6%, causing a 5% increase in the percentage of unemployed population in the worst year of the last crisis). If this scenario of structural crisis was finally confirmed, the most important thing would be to face the problems realistically and seek medium-term solutions through agreements between financial entities, developers and investment funds. This last aspect is differential with respect to the previous crisis, since the relative consolidation of our financial institutions and the greater solvency of the developers’ balance sheets, are combined with the presence of institutional funds in Spain that are used to carry out transactions and that are in constant search for new business opportunities that contribute to the dynamism of the sector.
Can we be optimistic about this situation? Of course, real estate is a safe haven difficult to replicate in other sectors of the economy today. And in this scenario, the Build-to-Rent re-emerges as the main character of the market. Being that said, we will continue to insist on the need to advance in the reduction of bureaucratic deadlines, as well as in the flexibility and updating of our urban planning regulations. Only in this way will we get the rental housing park at affordable prices that we need.
In our sector we have proved that together we hold talent, optimism, ability to work and the desire for achievement. Shall we turn back the Clock together?