Global travel restrictions are expected to hamper the property industry’s recovery, and industry figures predict a poor second quarter for investment even as cities slowly emerge from some of the measures put in place during the spread of Covid-19.
“The economic uncertainty created by the coronavirus and the problems of organising site visits and international travel during lockdowns means that investment transaction volumes in Europe have dropped sharply,” says Duncan Owen, global head at Schroder Real Estate Investment Management.
Duncan adds that in a normal month, central London would see between 25 and 30 office investment transactions. In April this year, the first full month of lockdown in the UK, there were only five.
“While all cities will be affected, the steepest fall in transactions is likely to be in those cities where international investors are most dominant, such as Amsterdam and London,” Duncan says. “Those cities may also see the sharpest correction in prices in the short-term. Paris and the big German cities, where domestic investors account for the majority of transactions, may be a little more resilient.”
Paris was a rare city in which commercial investment during the first quarter of 2020 was not below the five-year Q1 average. The city posted an 8% increase in total investment volumes, according to research from Savills using RCA data.
Sentiment remains strong
Zachary Gauge, European real estate analyst at UBS Asset Management, expects office investment levels in London and Paris to be low in Q2, with most deals in London postponed until at least the second half of the year. But he believes that investor sentiment towards these cities remains strong.
Elsewhere, Gauge says that the early easing of restrictions in Berlin may let investment and leasing activity progress during Q2. Munich will prove to be one of the most defensive markets in Europe from the supply side, he adds – it had just under 26,000 sq ft of office space available at the end of the first quarter – and will remain one of the lowest yielding cities in the continent.
Milan, despite lockdown measures starting to be eased, will struggle to get its occupational markets going again, Gauge says, as restrictions remain in place and vacancy relatively high, having hit 10.3% in the first quarter of 2020. “The weight of capital which was targeting prime assets should help limit outward yield shift in Q2, but we may see landlords reducing rents and increasing incentives to encourage activity in the occupational market,” Gauge adds.
For Justin Curlow, global head of research and strategy at AXA IM – Real Assets, cities reliant on tourism, leisure and conferences, such as Amsterdam, are at risk of a slower recovery than those with a more diversified employment base like Paris, Tokyo, London and Munich. But he adds that “the impact of long-haul travel restrictions may hinder the recovery of those also defined as retail and business destinations”.
Transport infrastructure
Infrastructure will also influence cities’ recovery post-pandemic, Curlow adds, as public transport use exceeds capacity in most global gateway cities. “In the context of social distancing post-lockdown, a reliance on public transport will likely be an inhibitor to the pace at which cities can increase capacity, giving an advantage to those which allow for running and cycling.
“Furthermore, the most populous and dense global gateway cities, including Tokyo, New York, Hong Kong, will find social distancing most challenging to implement over the short-term – just think about the elevator/lift capacity for high-rise buildings – meaning the risk of a second, third or fourth wave is significant in these cities, allowing for second-tier cities to lead the recovery effort.”
Hong Kong, which reported its first case of coronavirus on 23 January and subsequently closed all but three borders with China and introduced a 14-day quarantine for visitors, saw office investment plummet by 93% in the first quarter, compared to the five-year Q1 average. Total investment volumes in the city dropped by 79% in the first quarter, compared to the five-year average.
Despite many cities continuing to impose travel restrictions and lockdowns only slowly starting to be eased around the world, Sophie Chick, director for world research at Savills, expects to “see an increase in investment and take-up activity, albeit off a very low base”. However, she adds: “Levels are likely to be subdued when compared to recent years.”
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