The European real estate market environment remains incredibly uncertain. While the severity of the current recession is significantly worse than the global financial crisis, real estate markets have, at worst, been subdued.
Outright distress remains largely limited to the retail sector thus far, with rents and values falling significantly – particularly for out-of-town assets. However, this is increasingly occurring for some high-street locations also.
In other sectors, the full effect of the recession is yet to be felt, as tenants are being protected by a combination of short-term credit flows and generous employee retention scheme packages. But this cannot go on forever.
Similarly, when it comes to debt availability, lenders are understandably adopting a cautious approach. Lenders are delaying covenant tests and allowing short-term debt rollovers, rather than risking a widespread value correction by taking stronger action. Again, this cannot go on forever.
Despite the gloom, there are reasons for optimism. Interest rates remain low, which is supporting valuations, while we continue to report better-than-expected rent collection across most of our strategies. Throughout the market, investors have raised plenty of capital and have significant liquidity to deploy. The dilemma investors are facing now is whether to put the capital to work now or hold out for opportunities linked to a market correction that may never materialise.
Investors eyeing similar assets
It is clear a two-tier investment market is being established in Europe. Assets in resilient sectors, such as residential, or where there is long-term structural growth potential, such as logistics, continue to attract capital. Pricing in these areas has changed little from before the covid-19 outbreak.
In these sectors, particularly for assets that have tenants with strong covenants – or in countries such as Germany and the Netherlands, where the covid-19 impact has been lower – there is plenty of debt available and transaction volume is growing.