Real estate must prepare for its most painful recession yet, with the International Monetary Fund warning that the global economy is entering the worst downturn since the Great Depression.
The IMF expects the global economy to contract by 3% this year, as the coronavirus pandemic triggers a “crisis like no other”. The loss to global GDP over the next two years could reach $9tn (£7.7tn), greater than the economies of Japan and Germany combined.
Real estate’s ability to withstand the crisis will be put to the test like never before.
The consensus among industry leaders is that real estate companies will enter the recession with far better balance sheets than they had at the start of the financial crisis, after which many companies took steps to reduce debt levels and gearings, allowing them to absorb more valuation declines.
Helen Gordon, chief executive of Grainger, said she had also never seen the government so engaged with the industry. “The result of how you make yourself more resilient through this will be a combination of state intervention and business confidence,” she said.
Focus on liquidity
However, Prestbury Investments’ Nick Leslau reckoned that early forecasts of a v-shaped recovery were “wildly optimistic”.
“I am naturally a positive person and would like to think things can return to normal sooner rather than later, but to profoundly believe that, I fear, ignores the reality that post Covid-19 we will all feel battle scarred, anxious, poorer, maybe unemployed and certainly without the bonuses we relied upon, and our desire and ability to spend our way out of this will be significantly diminished both personally and corporately,” he said.
“That is, of course, before working out the cost to society of reducing the unprecedented levels of peacetime debt building up at the moment.”
Leslau added that every business must focus now “on liquidity and its preservation, as none of us know how long this will last”.
“Many businesses, especially those with high operational leverage, will need to ensure they build the very longest survival runway for themselves, often by making very tough early decisions, to ensure the threat for them is not an existential one.”
Be flexible
British Land chief executive Chris Grigg urged companies to be flexible in how they deal with growing uncertainty.
“People start asking, is this a w-shaped, v- or u-shaped recovery, whatever. The truth is, at a time like this you should hold your views with greater scepticism than usual,” he said. “It is bold and foolish to subscribe to one view strongly.”
Grigg said more time should be spent on planning for a range of scenarios. Having a three- or four-stage model – broken down into managing the near term, the situation during lockdown, recovery post-lockdown, and the longer term conclusion – is a methodology that will help.
He added: “For the first time since the Great Depression, governments around the world are actively trying to slow their economies down. Trying to figure out the consequences of this is hard. It doesn’t matter how experienced you are – this bit is new territory.”
Speed up strategic decisions
Industry leaders agree this next recession will, like previous ones, accelerate trends occurring in every subsector, as strategic decisions will need to be made quicker.
Andrew Jones, chief executive of LondonMetric, said: “The trend towards convenience food retailing or e-commerce has been clear for many years. They have not only navigated this unprecedented period of disruption successfully, but thrived and enhanced their propositions.
“The impact on yields across the sector will be stratospheric, with the winners enjoying significant compression and the most vulnerable weathering material outward movements.
“If you have the wrong portfolio mix today, you could be in real trouble. However, sympathies in physical retail will be thin [for several sectors] as there were plenty of warning signs.”
Rebalance portfolios
For Allan Lockhart, chief executive of NewRiver REIT, ensuring portfolios are positioned accordingly will be critical. “Take retail – obviously recession will impact consumer spending, which will have more of an impact on discretionary spending,” he said.
Johnny Sandelson, chief executive at developer Auriens, will be among those rebalancing their focus. “For my own business in senior housing, the emphasis is going to be changing now,” he said. “It will be as much about medical security as it is about hospitality. We are going to want to be able to say we have the safest buildings to look after our elderly. You can’t be pandemic-proof, but you can make sure you have safeguards.”
Sandelson added: “On one side we are feeling optimistic that a light will be shone on our sector. But, there is no doubt that everyone is going to be affected economically.”
Pull together
For Tim Heatley, co-founder of Manchester-based Capital & Centric, the importance of pulling together during a recession should not be downplayed, even if it means helping rivals.
“People understand that everything is connected much more than they did the last time around,” Heatley explained. “There is a global responsibility, national responsibility, regional responsibility and an industry responsibility to ensure that we don’t all just lock the doors, as this will be just like a boomerang and crack us all on the back of the head.
“We need to continue to keep lines of communication open, be patient, help people out where we can, even helping out competitors to keep things moving and liquidity going as it will help us all.”
See also: Recession lessons – reasons not to be cheerful
