Real estate investors are holding off on deals because of the Covid-19 pandemic, leaving lenders in a wait and see mode at this stage, market sources told CoStar News.
As uncertainty over the coronavirus outbreak filters through to investors, deal activity in global commercial real estate is expected to slow over the short term, with extended transaction timelines and delayed launches already evident in highly affected markets, JLL noted in a report on the global real estate implications of coronavirus. Interest rate volatility is impacting lenders, which remain in a phase of price discovery, particularly in the US, where debt providers are struggling to price assets. Nevertheless, the supply of credit continues to be abundant, JLL said.
Another report from UBS Asset Management also highlighted that transaction volumes are expected to slow considerably, despite the low cost of debt, as real estate investors price in diminished future income expectations. More uncertainty and slower transaction volume is likely to place upward pressure on cap rates, it added.
“The markets are moving so quickly and in an unprecedented manner that no-one has really been able to formulate a clear plan or strategy – whether that be in equity or debt capital markets. The reality is that liquidity is now at a premium and that transactions in hand will either pause, fall apart or be re-priced,” Tony Smedley, Heitman's managing director and head of European private equity told CoStar News. “It is too early to tell what pricing impact all of this will have.”
In the US, investors are taking a big pause on deals and, as banks increase margins, finance will be harder to come by, industry participants said at an e-meeting held by the GRI club about the impact of the Covid-19 on the real estate market. US money into Europe especially has frozen and certain refinancing decisions have been put on hold, members of the GRI club noted.
“We have seen a pull back of US money – Asian money completely disappeared from January,” said James Wright, head of real estate finance at Link Asset Services. “The nervousness is affecting lenders here [in Europe] but it’s too early to understand the impact on pricing and availability. I think everyone is now expecting a massive global recession which will not be over quickly.”
A market source who preferred to remain anonymous noted: “I haven’t yet seen lenders trying to re-trade on margins, but that may be because I’m mostly seeing a big pause [on deals], so no discussion about margin becomes necessary. I think it will come when the finger comes off the pause button.”
According to UBS AM, transactions should rebound when economic conditions improve while there should not be widespread distress. “Today’s high occupancy rates imply that most assets can continue to service debt payments even during a negative but quick economic event,” the asset manager said.