European Real Estate Markets Frozen by Global Pandemic

(Bloomberg) -- Bankers could be seen fleeing the London headquarters of Commerzbank AG on Tuesday, cradling computer monitors as they face an unknown stretch working from home.

A block away, the stores of One New Change, the stealth bomber-shaped mall opposite St Paul’s Cathedral, are almost entirely empty, already prompting retailers including Hennes & Mauritz AB’s H&M clothing store to seek rent cuts from landlords. By Thursday, Europe’s real estate capital was bracing for the prospect of a full lockdown.

Across the continent, real estate markets are going into hibernation as investors struggle to gauge the impact of a widespread shutdown on their tenants’ ability to pay rent. The list of companies begging for concessions from property owners is rapidly growing. Meanwhile, the pile of postponed property deals mounts.

Already, more than 11 billion pounds ($12.7 billion) has been frozen in U.K. property funds as their appraisers warn the novel coronavirus that’s locking down Europe has made it impossible to assess their value. It’s one of the most visible symptoms of an outbreak that’s also quietly delaying major property sales.

The sudden threat to the underlying health of companies that pay their rent is an unwelcome shock for office and warehouse landlords that have been enjoying record pricing in much of Europe and are suddenly being forced to reappraise. For retail and hospitality property owners, it could be fatal.

“The evolving Covid-19 outbreak could have profound effects on real estate,” Peel Hunt analyst Matthew Saperia said. “The implications could be far reaching but quantifying these is highly speculative at present.”

Retailer Trouble

So far, retailers including H&M, Superdry Plc, Burger King and New Look have sought concessions from landlords or said they will temporarily halt rent payments. For previously struggling retailers like Laura Ashley Holdings Plc, the virus has already proved fatal.

At the same time, mall landlords in Europe including Unibail-Rodamco-Westfield have been forced to close many of their properties as governments struggle to get a grip on the virus’s spread. The subsequent market turmoil has already played a part in forcing embattled U.K. retail landlord Intu Properties Plc to postpone a 1.3 billion pound capital raise.

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Now the virus could stymie Intu’s chances of a rescue plan. Asset sales, among the few tools remaining to reduce its indebtedness, will be more difficult in this market, Bloomberg Intelligence senior analyst Sue Munden said. “Intu scraped through as a going concern in March, but by July it’s unlikely given looming debt maturities,” she said.

For investors with cash, there are potential opportunities, though they are hard to find. Government bond yields, which have plunged since the outbreak started, are commonly used as a gauge for commercial real estate pricing, so real estate now looks relatively more attractive. But economic growth largely drives rents, so an economic shock is likely to put pressure on pricing.

“It is a question of how it will balance,” Paul Kennedy, head of real estate strategy at JPMorgan Asset Management, said in an interview.

Distressed Sales

There may be little to buy until clarity returns, or lenders force distressed sales. AEW SA last week postponed the launch of a 900 million euro ($978 million) office portfolio it had planned to offer investors at the Mipim conference in Cannes in the second week of March.

In London, buildings that were being prepared for sale, including an office leased to Deloitte LLP, are now being held back, people with knowledge of the situation said. Aviva Plc’s investment management unit delayed the sale of a 100 million pound complex in Euston, Estates Gazette reported Wednesday.

Other transactions, including the disposal of the Ritz Hotel in London, are likely to take longer than previously expected, if they do progress at all, two other people said. The merger of brokers LSL Property Services Plc and Countryside Plc is already on the scrap heap.

When the fog of uncertainty clears, asset managers will look to rebalance their allocations between equities, bonds and alternatives like real estate, to factor in relative price movements that will affect their weightings. That’s likely to provide a source of deals as some funds find themselves overweight property due to sharp share price declines in more liquid assets.

But it will likely also mean a reappraisal of deals by fund managers who have been chasing returns in a pricey market, taking on more risk.

“At the end of a cycle you do see style drift and we have definitely seen that recently,” JPMorgan’s Kennedy said. “Style drift becomes a problem when you have to pay for the risk that you have taken on. Where this is going to hurt is investors who drifted away from core.”

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