Comment: HNWIs from developing markets are looking to invest in European assets

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The knock-on effects of the coronavirus pandemic - widespread panic, quarantine, falling oil prices, and weakening oil-dependent currencies like the Russian ruble - are hitting the real estate market hard. By George Kachmazov

The hotel and retail segments were the first to fall. Cafés, restaurants, and shopping malls have been forced to close their doors - and as I write, companies are cutting costs and downsizing, while hotel operators are asking landlords to lower rental rates.

The first bankruptcies in the hotel segment have already started and it's likely that buyers will be able to negotiate up to 20% off the asking price of some properties in already overheated markets.

Long-term residential rentals — apartments and entire apartment buildings — will be affected the least. Most tenants will only ask for discounts if the macroeconomic decline is significant and drawn out, in other words, if GDPs fall sharply and unemployment rates rocket. This explains why in a normal economic situation, residential property yields less than commercial: the lower the risk, the lower the yield.

We will witness a general decline in global economic growth rates - it's anticipated that by the middle of 2020, this decrease will seriously affect the European and US office space segments, forcing companies to ask for rent reductions or to move out of their offices if their landlords won't budge.

For most companies, this year will be a write-off from an economic standpoint. The most optimistic forecasts predict that the normal real estate market rate will recover in the autumn.

How are countries reacting?
Many countries, acting through regulators, have announced supportive measures for the market. For example, the FED has slashed its interest rate to 0% and it's likely that the ECB will resume quantitative easing. We expect that cheap leverage will allow the market to weather the turbulence without catastrophic losses.

How are HNWIs reacting?
Despite the crisis and quarantine, HNWIs from developing markets have wasted no time in actively showing their interest in investing in foreign real estate. Over the last few days, five separate major capital owners have contacted Tranio.

Most investors are adopting a rational approach: they want to find attractive investment opportunities over the next four to six months. Nobody expects to be able to buy anything cheaply right now because:

Russian investors are not the only ones who want to buy assets at affordable prices during this crisis. Those with significant amounts of capital in other markets are also taking a keen interest."

1) at the moment it's technically impossible;
2) bankruptcies can be expected in due course.

The interest of HNWIs during the crisis is not a coincidence. A number of our clients have told us that they have been waiting for a recession to hit the overheated market so they can buy discounted properties but investors understand that regardless of the crisis, pumping capital into good real estate remains very difficult. 

HNWIs from developing markets, including Russia, have mostly been holding their capital in stable currencies to avoid the consequences of tumbling local currencies. However, wary of the situation worsening in their homeland, they've been quick to direct their attention to international investments - on average, they're investing a total of €50-100m in multiple projects, parting with €10-20m for each. The average yield expectations are realistic at 10-15% per annum in dollars or euros. For most major investors, this is not the first step towards real estate investment in Europe and the US.

How are HNWIs reacting?
According to our experience, Russian investors are not the only ones who want to buy assets at affordable prices during this crisis. Those with significant amounts of capital in other markets are also taking a keen interest.

We expect up to 20% to be discounted from some properties and we don't expect any sales at rock-bottom prices because:

  1. too much cheap leverage has been accumulated in the world over the past five to ten years;
  2. governments will endeavour to protect businesses and people.

How will investors with budgets up to €1m react?
With regards to Tranio's business, we expect the number of enquiries from Russian-speaking buyers with budgets of around €1m to decline by about 50%. However, we don't expect the rate of enquiries from international buyers to fall: Europeans, Americans, and Asian investors will probably remain just as interested in foreign property as they were before the crisis. This is because these clients will not be affected by the fall in oil prices and currency fluctuations as severely as Russians.

What's next?
In three to six months, expect to see some attractive offers appearing. We see several opportunities materialising:

1) Crisis management of facilities, managing tenant relations;
2) A demand for distressed assets, primarily in the hotel segment as it's the most affected, but also in other niches, depending on how hard the markets are hit;
3) Land development because the risk premiums for such assets will be higher.

George Kachmazov is founder and managing partner at Tranio, a real estate platform provider

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