The coronavirus crisis is likely to drive a flight to high quality, core properties across global real estate markets, according to new research from global financial services firm Barings.
In a new report, Barings said that lower interest rates should help to support asset values and demand for cash-flowing assets, but expected investors to take a 'safe haven' approach in the near term.
Asia is feeling the pain of the coronavirus most acutely in the commercial real estate markets, but Europe and the US face material challenges across tourism and other industries, the research said.
For commercial real estate, the most immediate and severe impact from the coronavirus outbreak will stem from the hit to tourism and travel, which is already affecting the lodging sector in major travel hubs around the world.
Marriott International, which operates 375 properties in China, reported a 90% year-over-year decline in revenue per available room (RevPAR) from its China hotels.
China's performance is of global significance, as the country accounts for some 7% of the world's departures, according to Tourism Economics.
In Europe, the most impacted real estate sectors are likely to be tourism and trade orientated—hotels, the report confirmed.
Serviced apartments, restaurants, leisure, sea and airport logistics are also potentially in the front-line, with supply chain disruption likely to impact retail, if the crisis persists. However, e-commerce might see a boost to the benefit of urban logistics operators, should consumption shift away from public spaces.
The region’s export-orientated economy was already beginning to struggle on the back of rising global trade tensions, the report said.
The worst affected country to date in Europe has been Italy, centred on Milan, a city 'more vulnerable to the virus with its significant tourist appeal and exceptionally strong trading linkages with China via the shoe and clothing fashion business'.
'However, the downside impact on real estate is probably more limited than one might initially think. This is because reduced property market transparency and liquidity tends to heavily insulate Italian property valuations from short-term macro volatility,' the report added.
Germany, Sweden and the Netherlands are all export growth engines and exposed to the global economy, but core real estate prices are best placed to hold up.
Prime property yields could actually tighten even further across all the major European cities — excluding retail assets, where pricing looks soft across the board.
'Another possible under appreciated vulnerability, albeit a small one, could be Helsinki. While the Chinese travel numbers lag behind other larger European cities in sheer quantum, great efforts have been made in recent years to grow the location as hub for Asian travelers seeking streamlined European visa applications.
Overnight and two day stays are increasingly common, and thus hotel and retail might struggle in the coming weeks here,' the report said.
In the US, while lodging will most immediately be impacted, store-based retailers could be the second most directly exposed to the crisis.
'Demand for industrial and office space should be somewhat insulated near term, but we expect businesses and investors will retreat to the sidelines until the outlook for the economy is less uncertain,' the report added.
'Leasing activity is expected to slow, but the bigger impact could be felt in the transaction market, where investors are likely to delay committing to new acquisitions.'
The report concluded: 'In summary, the commercial real estate sector is fortunate to some degree, in that property market fundamentals are generally healthy across most sectors and markets, and lower interest rates should help to support asset values and demand for cash-flowing assets. But in the near term we expect a flight to high quality, core properties.'