After the virus, the hunger for opportunities

Rafał Ostrowski, ‘Eurobuild CEE’: Invesco as an international investment management company transacts around EUR 4 bln per year. In 2020, what portion of these deals will be frozen due to Covid-19?

Tomáš Picha, senior director of Central & Eastern Europe transactions, Invesco: Pretty much 90 pct of all deals have been frozen now and the reason why they have been frozen is that everyone kind of expects that the new tomorrow will be different from what we used to know. I, however, really expect that a vast majority of those deals will really transact. I don’t think that deals will stop going through, especially in the core segment.

How much value will real estate lose due to Covid-19?

I don’t expect a lot of repricing – especially in the core segment. I can’t imagine a situation where sellers will be ok to drop their prices by more than 20–30 pct. If they are asked to do that, the transactions will not proceed. It has to be borne in mind that core funds don’t expect a lot of movement.

You’re saying that sellers will just hold on to their properties until the pandemic passes, because now they would have to offer discounts, which they are not really willing to do?

Anyone rational will not be selling now. If you start selling in these times the market will read it as you being desperate. And now we need to see things from the developers’ point of view. If you are Skanska or HB Reavis and your business model is to sell what you have built, it is different. But if you are an investor and you have a big portfolio like us and you want to sell, this will be very difficult now because the market will immediately smell blood.

Despite the pandemic, we can, however, see some transactions that are being finalised in the CEE region, including in Poland. When do you expect the real estate investment market to unfreeze totally?

I think that not much is going to happen until September. The summer will be very fragile when it comes to assessment. People will be trying to understand the impact of the pandemic. Real decisions will start to be taken from September. Tenants’ business has changed completely, and you can’t really assess the business of each tenant individually, to know how it changed. Once a tenant stops paying the rent but you are still expecting to be able to sell the property, an awkward discussion arises over who takes on the risk when these guys won’t pay the rent. Like: whose fault is that? Is it the seller’s or is it the purchaser’s? And such a discussion will be almost impossible to resolve. So generally, I think all the tenants will have to start paying the rent and start acting in line with the contract. Otherwise these fragile situations cannot be resolved.

In the segments that have suffered most are you expecting some really attractive opportunities to pop up for investors?

There will be some opportunities for sure, but I think they will require a fairly creative approach. That’s because you won’t be able to buy these assets based on their former assumptions. And I think it might be very difficult to re-assess them. You will have to figure out some alternative use for them or some short term plan B for how to really use the situation, because for the next 18 to 24 months I expect some businesses, like tourism for example, to be totally different from what we used to know. So if you can buy any real estate, a hotel for example, below the replacement cost, these will be the opportunities. But only as long as really you know what the function should be and how to monetise the business on a different basis to how we knew and how we understood the hotel. These assets will be the winners. But I don’t think there will be many core players waiting for hotels to crash and then buying them at a discount and maybe changing them into offices. I don’t believe that. The discount would have to be massive to buy into this risky segment.

What have been the changes to the cash-flows in the hotel sector since before the pandemic?

When you talk to most hotel operators now, they say: Sorry, we have two to three months of liquidity left, but we can’t really pay your rent. So, the whole segment has been completely re-shuffled and contracts don’t mean anything. There will have to be some new compromise over how these assets will start working again and on what basis. And only once this is settled will people be able to understand what the business in the next two to three years will be, with the view that in five years’ time people will be able to underwrite this and business will get back to normal. But we will still have to figure out how to overcome that short-term to mid-term alternative. We are running a big hotel fund and we have told our investors that in the next 6 to 12 months we will only be able to collect 10–20 pct of the NIY that we previously thought. This is a massive drop.

And retail?

The same applies to retail to same extent. I would say that shopping centres are dead in terms of deals for the time being. I can’t imagine they will trade, to be honest. I don’t believe there will be a lot of players looking for opportunities in such segments unless they are completely overhauled. The general consensus is that the next twelve months will be very tough for that business. This might create opportunities, but you need to have a very strong conviction about why you are buying into that segment.

In what shape will alternative investment come out of the coronavirus crisis?

It differs according to the sector. Some segments, like student housing for example, have been hit more. In the US, for instance, some of the largest decreases in value were experienced in this sector. As colleges closed, some people took up home education – and there is the general feeling that campuses will be less necessary. I’m not saying that the same will necessarily happen in Europe, but in the US the fall in this index was one of the highest. On the other hand, PRS will absolutely be the most resilient sector. In Germany, which is the largest PRS market in Europe, the valuations have hardly fallen at all. And the income line is very similar. This is simply because homes are a basic need.

The obvious winner out of the pandemic has been warehousing. Has this sector proven completely immune?

It is not completely resilient. At least 50 pct of warehouse tenants are looking to receive some kind of rent discount from their landlords. But the logistics sector will still be regarded as a safe haven. A lot of companies will reshuffle their methods of distribution – moving them much closer to their production facilities and making them less dependent on Chinese markets. This heavy focus on having assembly and production plants close to distribution channels is very good news for logistics. People will perceive it as a solid segment to invest in and I believe that yields there will move the quickest.

And if there is a second coronavirus wave in the autumn, or maybe multiple waves in the future, what will be the impact on real estate then?

If there is a second Covid wave, the GDP of some countries could shrink by 10 pct over the year. What country could afford that? I think the consensus now is that we will not be able to turn off the economy for another 3 to 4 months. We have seen different approaches to the situation across Europe. None of them have emerged as the clear winner. My personal opinion is that if Covid-19 came back in the same manner then countries would not close down in the same drastic way as in the first wave.

How do you compare this crisis to the great financial crash of 2008? Is it much worse now than back then?

It is very different. The banks are very well capitalised. There has been no crazy leveraging, so there is massive amount of equity. This has been an external shock that has nothing to do with the system itself. This massive equity will be desperate for the right opportunities.

INVESCO’S MAN IN THE CEE

Tomáš Picha is a senior director of transactions in Central and Eastern Europe at Invesco Real Estate, one of the largest independent global fund managers with more than USD 1.3 tln of assets under management. Based in Prague, he oversees the direct real estate investments in the Czech Republic, Poland and other Eastern European markets where Invesco has an investment interest. He graduated from the University of Economics in Prague and has more than 17 years of experience in real estate investment with a focus on CEE markets.