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Surreal Estate: The forthcoming exodus

By Marius-Cristian Frunza
Weekly Briefs

Where is the real estate market heading after the pandemic?

Before the pandemic, we heard that the real estate prices are too high, housing is inaccessible to the middle class, big metropoles are overcrowded,... The current crisis will seemingly deliver us from all these issues. But what will be the price to pay?

The social distancing rule brings already significant changes in the catering and hostelry sectors. Most restaurant, bars and clubs operate with a high volume-low margin model and are facing extinction in the current constraints imposed by the coronavirus crisis. The initial data from Italy, show that after reopening, more than 25 % of businesses operating in catering and hostelry may never open again. For those remaining in business, the observed default rate could peak over the next 12 months.

The massive increase in online commerce is a severe threat to commercial real estate.  The remote work decreases pressure on the infrastructure and should reduce the occupancy rates in offices.

The first heavy tendency in the real estate sector is a massive crunch in commercial property prices. Moreover, some of the commercial real estates may lose its value entirely and transformed in housing, where possible.

The second heavy tendency is a significant drop in prices in housing prices. The dip is expected to be higher in metropoles, where we will witness an exodus towards less agglomerated areas. Indeed, when you are a full-stack developer is more comfortable to live and work from Boise, Idaho than in San Francisco Area. If you are a web designer is much cheaper and more inspiring to live in San Luca in the South of Italy, than in a Frankfurt suburb.

A small increasing trend could occur in some niche markets encompassing industrial property and country-side houses.
Another factor impacting the real-estate price is a foreseeable increase in the mortgage rates. Despite a decrease of the interest rates across the board, the rise in unemployment and the massive GDP contraction drives the mortgage rates to higher levels, thereby putting additional pressure on real estate housing.

The pandemic could reshape the real estate market landscape brutally.  The market contraction depends on the size of the exodus and the economy's capacity to absorb such a big shock.

So I have come down to rescue them from the hand of the Egyptians and to bring them up out of that land into a good and spacious land, a land flowing with milk and honey.
Exodus 3:8

Market overview

The Dow Jones US REIT index reflects the performance of US-based real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate. Since the beginning of the year, this index dipped by 21 %, underperforming the Dow Jones that lost only 14%. While the equity index shows signs of recovery, the REIT index remained clustered around the same level after the April rebound.  It delivers of strong signal about the foreseeable situation of the real estate market.  

The residential property continued to generate revenue since the beginning of the pandemic, but the market expects a significant correction in housing prices. The other side of the medallion is that commercial property could remain indefinitely in limbo, with meagre rent collections and no transactions.

Focus:

REITs

The evolution of REITs' prices provides an accurate snapshot of the expected dislocation on the real estate market.

Simon Property Group (NYSE: SPG) the biggest US REIT in retail property lost more than 60% of its capitalization amid the pandemic. It underscores the highly distressed situation of commercial properties- Avalonbay Communities (NYSE: AVB) and Equity Residential (NYSE: EQR), REITs investing in residential properties plunged by over 25% since the beginning of the year.

Focus:

Hotels

The shares of the leading hotel chains underperformed the equity indices. Wyndham Worldwide, Choice Hotels and Marriott International plunged dipper than the S&P 500 and recovered less. Since the beginning of the year S&P 500 lost around 9.5%, while Wyndham and Marriott lots more than 40% of their capitalisations. Choice Hotels announced a brand conversion strategy and consequently had a smoother price contraction of  24%.  The outlook of the hostelry sector is not bright, and the low number of tourists at the beginning of the summer could bring further corrections.

Market outlook

As expected, the Gold ounce and the Brent crude oil continued their progressions. Over the next week, we can witness a price stalling on the commodities prices, but in the long term, the trend should remain positive.  Bitcoin's prince swung around the 9,000 USD level and lost its momentum from early May. While the perspective it still bullish on Bitcoin the timing is uncertain.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial in- strument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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