You Asked Us: How is the global commercial property market weathering the Covid-19 downturn?

The presentations gave great insight into conditions in the major markets; I wonder if you could say a little bit more about general sentiment in the smaller markets – particularly those of Africa and eastern Europe.

Simon Rubinsohn: The disruptive nature of recent events is very visible in feedback from eastern Europe, but the results for South Africa are particularly poor. Covid-19 is adding another big challenge on the top of a multiplicity of existing economic, political and social challenges.

Hungary, notwithstanding its own political issues, has been a market where sentiment towards commercial real estate has been pretty positive until recently. But the macro shock is taking its toll and both rents and capital values are expected to fall over the coming twelve months. The turnaround has been less dramatic in both Poland and Czech Republic, but that has more to do with the mood music at the end of last year – which was not quite as robust as in Hungary. Current RICS indicators are telling a broadly similar story about the current picture. The insight we have received from Nigeria is more resilient than that seen from many other parts of the globe although demand has softened in the market.

Could you enlarge on the state of play in transaction markets – particularly in light of the huge discrepancies in market sentiment and market price tendencies?

SR: Deal volume has predictably plunged across the globe in the second quarter as referenced by data gatherers such as Real Capital Analytics. The real issue surrounds the sort of recovery in transactions that is likely to ensue. From that perspective, market sentiment can be a helpful guide both to the scale of the uplift and areas where activity may pick-up more smartly.

Our indicators are certainly cautious about investor behaviour over the balance of this year and into 2021. This is not altogether surprising given the level of uncertainty both about economic activity and Covid-19. In terms of international capital flows, the preference for the US highlighted in our survey may well be a signal that global investors are focusing on safer assets for the time being.

How might a prolonged period of social distancing affect property values? Businesses may require more floorspace, but will derive less “operational” value per square metre – could that have a balancing effect on the value of the overall space?

SR: It’s an interesting point. My sense is that most businesses will look to use space efficiently within the broad parameters around social distancing. That is likely to mean more flexible working arrangements. The survey findings certainly and consistently point to office footprints being scaled back – typically by around 10%.

Meanwhile with weaker economic growth and a mountainous legacy of a public sector debt to be repaid at some point, property values are likely to remain under some pressure even with the cost of money at rock-bottom levels.