Waiting for a recession: as the Russian ultrahindi saving money in real estate
The coronavirus pandemic, panic on world markets, quarantine, falling oil prices and the falling ruble have affected the real estate market.
The first to suffer were the hotel segment and retail-cafes, restaurants and shopping centers. Already, companies are cutting costs and staff; hotel operators are renegotiating with owners to reduce the price of rental contracts.
We assume that the first bankruptcy in the hotel segment will begin in two or three months. We can expect that there will be offers on the market for the sale of real estate at a price below the peak values of the beginning of the year.
The least affected housing for long-term rent-apartments and apartment buildings. Tenants will only ask for discounts if the macroeconomic downturn is significant and prolonged: GDP will fall significantly, and unemployment will rise. This explains why housing in a normal economic situation gives less return than commercial properties: lower risk — lower return.
As the situation develops, we will see a General decline in the growth rate of the world economy. Depending on the depth of the fall, the office segment in Europe and the United States will suffer: companies will move out of their offices or agree to reduce the cost of renting. We predict this development within four to six months, by the middle of 2020.
For most companies, this year will be lost from an economic point of view. The most optimistic forecasts: the normal pace of the real estate market will recover in the fall.
States, represented by regulators, announce measures to support the market. For example, the fed lowered its key rate to 0%. It is likely to be followed by the ECB’s quantitative easing actions. In our opinion, cheap money will allow the real estate market to go through a period of turbulence without catastrophic losses.
The reaction of the Russian ultramagnetic
Despite the crisis and the quarantine, Russian ultrahainets are already actively interested in the opportunity to invest in foreign real estate. In the past few days, Tranio has been contacted by five family offices of major capital owners.
Most investors have taken a reasonable position — they want to find interesting investment opportunities in the next four to six months. No one expects that you can buy something cheap right now, because: 1) it is now technically impossible; 2) real bankruptcy is worth waiting for a little later.
The interest of ultramagnetic during the crisis is not accidental. Several of our clients told us that they have been waiting for a recession in the overheated market for a long time to buy objects at low prices. Investors understand that despite the crisis, it is just as difficult to invest in good properties as it was before the crisis.
Russian owners of large capitals kept their savings mainly in foreign currency, so they have not been affected by the devaluation yet. But, fearing a worsening situation at home, they turned their attention to foreign investment.
The average volume of an interesting transaction for them is €10-20 million of equity, and they also rely on project financing. The total investment is about €50-100 million (equity). Average yield expectations are realistic-10-15% per annum in foreign currency. For most large investors, this is not the first step to investing in real estate in Europe and the United States.
The reaction of the English-speaking ultramagnetic
In our practice, Russian investors are not the only ones who want to buy an asset at a favorable price at a difficult time. The same position was taken by the owners of capital in other markets.
We assume that discounts on individual objects can reach up to 20%. We do not expect sales at bargain prices, because:
over the past five or ten years, the world has accumulated too much free money;
the state will try to protect businesses and the population.
Reaction of investors with a budget of up to €1 million
We see this reaction from customers:
the number of Russian-language applications in the budget to €1 million decreased by about 50%;
the number of English-language applications does not fall: Europeans, Americans and Asians are interested in foreign real estate just as they were before the crisis. We attribute this to the fact that foreign clients were not affected by the decline in the cost of oil and currency changes.
What will happen next
We can expect that in the future of three to six months, the market will have favorable offers. We see several points of application of investment activity as attractive:
anti-crisis management of objects, management of relations with tenants;
repurchase of debt that has assets under it;
search and purchase of cheaper properties in the hotel segment as the most affected industry. Then – in other niches, depending on the depth of the market fall;
purchase of land plots without a construction permit. These are assets in which the rental flow or profit from resale is most remote and not obvious during a recession, and risk premiums are highest.