Impact of Covid-19 on the Real Estate Sector

In a matter of weeks, the lives of so many have changed in ways they had never imagined. People can no longer meet, work, eat, shop, and socialize as they used to. The working world moved rapidly from business as usual to cautious travel, office closures, and work-from-home mandates. Instead of traveling and going out to eat at restaurants, consumers across the world are tightening their purse strings to spend only on essentials: primarily food, medicine, and home supplies, and getting these delivered much more often.

Physical distancing has directly changed the way people inhabit and interact with physical space, and the knock-on effects of the virus outbreak have made the demand for many types of space go down, perhaps for the first time in modern memory. This has created an unprecedented crisis for the Real Estate Industry. Beyond the immediate challenge, the longer this crisis persists, the more likely we are to see transformative and lasting changes in behavior.

How COVID 19 will likely affect Real Estate Sector

The impact of the COVID-19 outbreak is being felt in all aspects of life with the largest impact on humans. This is already changing behaviours and responses to everything including the real estate sector. The impact on the various segments of real estate is quite unique. Though it is easy to assess the short-term impact of the pandemic on this sector with the total global shutdown, the long-term effects cannot be determined yet.

Looking at the three different segments of the market, you see that the hospitality sector is experiencing short-term volatility with low occupancy rate. Retail will experience low cash-flow due to reduced demand. Expectation is that non-essential goods retailers may seek rent reliefs from landlord while those retailing essential goods with the infrastructure to respond to online orders and home delivery are beneficiaries of social distancing.

The office sector will experience short time disruption as more people work from home. Physical office use rates will fall as remote working increases, and landlords with exposure to short-term leases are the worst hit. Co-working space operators are at higher risk. In some cases, landlords are negotiating new leases or renewals with tenants to ensure deals are executed.

The residential market will remain resilient to the effects of COVID-19. Demand for new homes and rents may rise as people may be seeking more sustainable homes post- COVID-19. However, low consumer confidence and reduced mobility will impact demand during this period of uncertainty. Technology is an important mitigator and we are seeing an increase in online transaction platforms.

Impact of COVID-19 on Real Estate Globally

Uncertainty is not good for development. The tide of speculations surrounding possible ill effects of the Covid19 spread is delaying investment decisions across the globe.

According to a report by Colliers Research, the decisions over commercial real estate acquisition are expected to be delayed due to Coronavirus scare, especially by the occupiers who depend on overseas clearances from Asia.

Almost 28 percent of the total investment in Indian real estate came from Singapore, Hong Kong, and China in 2019. In fact, the United Nations UN, is predicting that India is at risk of facing an immediate trade loss of approximately Rs 2,510 crore.

As the supply chains from China will remain constrained, finding newer markets for the supply and even achieving self-sufficiency will take time and hence, India might face reduced economic activity.

Commercial real estate market will be more impacted as it is a slow mover. If the virus keeps impacting the economic supply chains for longer terms than expected, the commercial investment decisions may take a back seat.

A flight of capital can be expected as the investors would tilt towards a more stable bond market for investment.

Financial markets are also sensitive to the spread, and the recent crash of the Indian stock market is a sign of growing anticipation of further decline in investor’s sentiment.

Impact of COVID-19 on Real Estate in Nigeria

The Nigerian property market has been weak for some time, and rents have fallen fairly drastically in major cities such as Abuja, Lagos and Port Harcourt for quite a while now. There appear to be signs it could be stabilizing but pandemic threatens that notion.

In fact, some areas in Lagos market has been strong and the vacancy rates very low, but there’s no doubt coronavirus will increase caution among many buyers and encourage a lot of sellers to defer transactions.

Specifically, industry watchers say that, except the government takes necessary step to strengthen the economy, the pandemic will push the Nigerian economy into another recession.

The Guardian research shows that key players expect government to announce fiscal stimulus package to cut down coronavirus negatively impacting the sector and the economy as a whole. There will be negative effects on employment as it will be a short, sharp shock to the economy.

The practitioners are already divided on the impact, it would have on real estate and house prices. While some argue that it will be negative – prices will go down. Others believe the property market will develop a bit of momentum, with the interest rate cuts and the easing of credit conditions.

The Chairman, Nigeria Integrated Social Housing Cooperative Society Limited, Yemi Adelakun said, one of the immediate impacts of Corona Virus is delay in investment generally and real estate in particular. In the US, people offloaded their stocks because of uncertainties. Similarly, decision to buy or develop properties will be negatively affected. Adelakun said: “Affordability may also be eroded in the event of depreciation of Naira value against US dollars. Already, the Federal Government’s decision to cut back on the 2020 capital and recurrent budget will also affect real estate negatively. You will recall the recent increase of Value Added Tax (VAT) from five to 7.5 per cent. The VAT increase on its own will have negative effect on home affordability, especially for low- and medium-income earners.

He urged the government to ameliorate the situation by reducing interest rate on mortgages like the CBN has done in other sectors; increase access to mortgage finance through special dispensation approved for farmers and SMEs to obtain loans from all banks at special rates.

“Moratorium on mortgage repayment will also be helpful in case of prolonged lockdown. In order to motivate development of affordable housing Government should consider making land available and granting tax relief on building equipment and materials,” he added.

An estate surveyor and professor at Federal University of Technology Minna, Muhammad Bashar Nuhu said that the impact would be more on the supply side. “This is so because of restricted movement of the expatriates particularly as it relates to large development sites.

“Secondly, the exchange rate is an issue and will definitely affect the procurement process and delivery. Similarly, the expected completion period would equally be affected,” he stated.

Nuhu urged the government to continue with the palliative initiative and the rescheduling of financial obligations. His words: “Furthermore, more money should be made available to people to cushion the effects on the real estate affordability and housing prices.”

In his submission, the President, Commonwealth Association of Surveying and Land Economy (CASLE), Mr. Olusegun Ajanlekoko explained that the immediate impact would affect the top to the bottom of the pyramid of the value chain. He said: “Globally, low economic activity affects the construction sector in a dramatic way. Construction and sales will nosedive.

“But for a shrewd developer, this is the best time to start development because of the cheap funding that is now available through the drastic reduction in interest rates. Albeit building for the immediate future. But generally, is bad news all round. Timely delivery is no longer achievable.  And new projects will be on hold.”

Ajanlekoko said: “Government should introduce an economic stimulus to the industry especially where funding is concerned.  A halt on payment of interest charges on cost of funding should be put in place to help developers cut down on their losses.”

The first Vice President, Nigerian Institute of Town Planners (NITP), Olutoyin Ayinde, stressed that coronavirus has a global effect on most activities, especially on economic activities.

According to him, the present situation is not strong enough to force down housing prices. But there will be a temporary lull. In due time, there would be a bounce back. “Even if you can do business online, check the house/apartment you like and make payment online, would the keys to the property be received online?”

An estate surveyor and valuer, former president, International Facility Management Association (IFMA) Nigerian chapter, Pastor Stephen Jagun, admitted that every economic transaction is grounding to a halt.

“What is paramount in the mind of everyone now is survival. Like in other climates where the economy is short down, I believe that it’s going to affect real estate.

“Even those paying rent will have to generate economic activity to have the capacity to pay. Hence, it may affect the ability of some tenants to pay and out practitioners in further challenge of rent collection as at when due. Some people may even lose their jobs as things are going. But they’ll still live in a house.” Jagun advised the government to cushion the effect of the slowdown in economy on businesses. “This will help the economy to pick up,” he added.

Measures taken by Government across the World to Provide Relief to the Real Sector.

Meanwhile, as the Coronavirus induced fear and crisis has engulfed the world as a whole, the International Monetary Fund has indicated that the world has already entered into recession. However, the governments’ world over are taking measures to cope with the situation and announcing relief measures as follows:

To ensure capital flows and liquidity availability in times of crisis, the Australian government has reduced the benchmark Repo rate.

It has also created a special funding facility to the tune of AUD 90 billion to help the ailing economy.

The French government has agreed to consider the Coronavirus epidemic a ‘Force Majeure’. It clarified that no penalties would be levied on the contractors or developers for any delays attributed to the deadly pandemic.

In the United States of America, though the building and construction have been categorised as ‘non-essential’ services and most of the construction activities have stopped, the Congress is mulling a special financial package (due for a vote). The package is expected to help construction workers and will provide relief to federally-funded projects.

In response to the Coronavirus-induced crisis, the Government of Canada will provide $27 billion direct support to Canadian workers (including construction labourers). Some states such as Ontario have also included the building and construction into essential services list. Construction Association of Canada has also released a detailed safety guideline for construction workers amid Covid-19 pandemic.

The Singapore Government has made special provisions to help the affected construction industry and labourers. It has allowed a refund on account of Man Year Entitlement (MYE) for construction companies starting April 1, 2020. They have also allowed the foreign construction workers to change an employer midway if they face hardships with the current employer.

Germany, which is also hit by the Covid-19 crisis, has readied the largest ever (Euro 400 billion) welfare package for the country, especially targeting the blue-collar working population. The government has also pledged to take over the wages for employees and compensate for the lost working hours due to Corona crisis.

The United Arab Emirates UAE, which has been a construction hotspot for years now, has also rolled out a special package for small and medium enterprises and construction industry. The government has released $27 billion stimulus to aid the economy hit by COVID-19 crisis.

The International Monetary Fund IMF, and United Nations UN, have urged the developed countries to put on hold the debt payment from the poorest of countries so that they can effectively fight the COVID-19 crisis.

The World Bank has pledged $14 billion aid package for the countries around the world to fight the Coronavirus menace. It is in addition to the monetary packages announced by the IMF for countries such as Tanzania, Pakistan and Madagascar. To fight the Coronavirus crisis, the World Bank has also released $1 billion in aid for India

Sources

https://guardian.ng/property/howcoronavirus-will-affect-nigerias-realestate-house-prices/

https://www.vanguardngr.com/2020/04 /covid-19-how-global-real-estatemarkets-are-bracing-up-for-impact/

https://www.mckinsey.com/industries/private-equity-and-principalinvestors/our-insights/commercial-realestate-must-do-more-than-merelyadapt-to-coronavirus