Covid-19: status as of 04/12/2020
Next Tuesday April 14th we accomplish one month after the publication and entry into force of Royal Decree 463/2020, of March 14th, which declared the state of alarm for the management of the health crisis situation caused by Covid-19 which has been extended under the same conditions until April 26.
Today, April 12th 2020, Spain accumulates 166,019 confirmed cases of contagion and 16,792 accumulated deaths. The daily number of deaths touched the 1,000 mark just a few days ago. In the ranking of deaths, it ranks second in Europe behind Italy, which already has 152,271 cases but 19,468 deaths. In the last week, the exponential increase in infections in countries such as the United Kingdom with 78,991 infected and 9,875 deaths, and the United States, whose confirmed cases of infection amount 533,378 and the number of deaths a total of 20,601, have drawn attention.
The Spanish economy has been paralyzed during all this time, except for strategic sectors such as the food and logistics sector, to cite two examples. The rapid spread of the coronavirus caused last March a collapse in the financial markets collapsing 30 to 40%. Sharp declines stemming from uncertainty forced governments to take extraordinary shock measures. In the case of Spain, a package of up to 200,000 million euros in public and private guarantees. This next week, the government launches the third package of 20,000 million euros for SMEs and the self-employed who need liquidity due to a halt in their activity. The European Central Bank, as well as the Federal Reserve, got down to work and promised to issue 750,000 million euros to buy public and private bonds. There is awareness of the emergency of the moment and of the need for mobilization. So much so that Germany has made the largest public debt issue since World War II.
The real estate sector: short-term paralysis and medium-term uncertainty
Let’s see how the coronavirus pandemic is affecting in the short term in the different groups that make up the Real Estate sector:
In the sphere of APIs (Real Estate Property Agents), visits to properties have been paralyzed and notaries are still operational but for strictly urgent cases as indicated by the Permanent Council of the General Council of Notaries in its circular 02/2020 of 18 March. This has resulted in an impossibility for most cases to materialize rental contracts or deeds of sale, being postponed to the lifting of restrictions. To get an idea of the magnitude of the impact in Catalonia, in the last 2018 corporate report of the Col.legi d’Agents of the Proprietary Immobiliària of Catalonia the number of associates exceeded 1,800 and more than 3,300 if the members of the 3 COAPI’s that make up the API collective in Catalonia. Anyway, there are not all who are. The “Registry of Real Estate Agents of Catalonia” (AICAT) had more than 7,500 operational AICAT numbers.
The Property Registry remains open as it is an essential public service as reported by the College of Registrars on March 15. However, their recommendation is to carry out the procedures in the registers online or by phone.
For engineering, public works, construction and building activities, as they are not identified as suspended activities in the annex to Royal Decree 463/2020 declaring the state of alarm, mobility will no longer be restricted for travel to the workplace from next April 13 to perform labor, professional or business benefits and, therefore, face-to-face and on-site jobs can be recovered. Budgets for works have experienced a sharp drop in the last week of the month, reaching € 260m, almost a third less than the previous week. However and at the same time, project budgets increased considerably during the same period, from € 114m in the third week of the month to € 512m. That is, the break has not been so significant. What will have to be observed will be the response of the market as soon as it returns to normal, with special attention to the rhythm of sales and price negotiations in new construction promotions.
For homeowners holding mortgage loans, RDL 8/2020 of March 17th was approved to grant the moratorium on the payment of the mortgage debt. Of course, under certain assumptions. This RDL is focused on holders of mortgages of habitual residence, of properties affected by the economic activity of businessmen and professionals or dwellings other than the habitual one in a rental situation in which the owner has stopped receiving the rent. On the other hand, they must be in a vulnerable situation and the loan must have been in force when the RDL came into effect.
In the rental market, measures have also been taken through RDL 11/2020 of March 31st for all housing rentals and for vulnerable households. The part dedicated to housing includes measures such as prohibiting evictions in the coming months (extraordinary suspension for a maximum period of 6 months from April 2, 2020), extending rents whose term ends during the State of Alarm (maximum 6 months) , and compel large landowners to provide alternatives to their vulnerable tenants (either a 50% discount or a moratorium on the payment of rent). In the same way as for the moratorium on loans, in the case of rent, a vulnerable situation will also have to be proven (art 5 RDL).
Financial institutions, and above all Banco Santander, are immersed in a whirlwind of concession of ICO Covid-19 lines guaranteed by the government in 80% and that are launched in packages of EUR 20,000 million with few days of difference, with the objective reaching 100,000 million to cover the short-term liquidity needs of SMEs and the self-employed. This measure is beneficial for banks, since much of the risk of default is assumed by the State. Not to mention access to liquidity lines at no cost through the ECB with the power to set market rates for each financial institution, and the relaxation of the provisioning requirements for damaged loans by the ECB as announced last March 21st.
The main Real Estate servicers such as Altamira and Aliseda (Santander), Servihabitat (Coral Homes), Haya (Bankia), Solvia (Sabadell) and Anticipa (Blackstone) have been accelerating the process of selling their properties since the end of 2019, motivated by the signs cooling of the previous months (decreasing growths, slowdown in prices, etc.), changes in the Urban Leasing Law such as the obligation to sign contracts for 7 years, and a left-wing coalition government that generates uncertainty. Some of them were already offering sales campaigns with aggressive discounts of up to 40%.
The first consequence of the covid-19 crisis has been the activation of contingency plans, such as the one announced by Haya on March 31st. Servihabitat, controlled through Coral Homes by Lone Star (80%) together with Caixabank (20%), announced an ERTE of 796 workers just 6 days ago. We will have to be vigilant. Everything indicates that the pandemic will accelerate this sale process. They already foresaw a market decline, and now with the pandemic they are reducing their structures to be more profitable. If this continues, the next few months can reap good buying opportunities.
The judicial, notary and administrative auction market has also been paralyzed by activity since the declaration of the state of alarm. At the moment, judicial and notarial auctions are still canceled in accordance with their specific regulations. However, tax auctions continue to be held, in accordance with the provisions of article 33 of Royal Decree-Law 8/2020, of March 17 that extends until April 30, 2020 the holding of such auctions, which have not concluded at the entry into force of the royal decree-law. This supposes a delay in the investments on the part of speculative buyers, and at the same time an additional margin for the demanded parts in executive way.
Real estate investment in tertiary – which includes hotels, offices, logistics and commercial premises (retail) – has registered an investment volume of 1,900 million euros in Spain during the first quarter of 2020, 25% more than the same quarter of 2019 However, since the state of alarm came into effect, investment investments have remained in stand-by and the impact that the pandemic will have is still unknown, highly conditional on its duration. There are no plans to open hotels, bars, restaurants and shops in the shortest time, and the return to normality will be a gradual process.
Real estate fairs have also suffered from the pandemic. The most notable cancellation has been the annual MIPIM fair that takes place in Cannes in mid-March and brings together the main companies in the sector worldwide. This year’s edition was initially postponed to June (2-5), but will finally be held exceptionally in Paris next September.
In short, we have been able to verify how the health crisis is having an impact on the sector in the short term and we already know its effects: stoppage of activity, renegotiation of income, paralysis of investment, extension of deadlines, deferral of deeds, uncertainty … The duration of this crisis, still unknown, and the market response once it returns to normal will determine the medium-term scope.
Residential New and Second Hand Market. What are the forecasts?
New construction is distinguished by having maturation periods of two to three years, and this characteristic makes it a potentially more vulnerable segment than the second hand market in a crisis such as this, especially due to its greater susceptibility to changes in the cycle and due to a possible surplus of housing that could cause an impact on prices. However, uncertainty prevails.
Some forecasts suggest that the recovery or digestion will be much faster than in the fall of 2008 due to a lower housing stock. Other forecasts are more pessimistic and project year-on-year drops in merchanting of more than 40%, from the almost 100,000 homes planned in Spain in 2020 to just over 55,000 homes. And this drop in sales would lead to a price adjustment of more than 15%.
At this point, it will fundamentally depend on the recovery of employment and access to financing, with the labor market forecast being the least clear, since banks face this crisis with more guarantees than the previous crisis. The number of unemployed in March amounted to 3,548,312, with 620,000 ERTEs. And we must consider that the business fabric is made up mostly of SMEs with limited endurance capacity in a situation like the current one. Those who cannot survive due to not having access to financing or due to the fall in activity and are forced to close, will push unemployment figures upward.
Decreases in prices and sales are also expected in the second-hand housing market, but uncertainty prevails given the evolution in the medium term. In the month of April we have already registered several counter down offers for properties for sale, between 20 and 30% below the offer price. Before the onset of the covid-19 crisis, there were already indicators suggesting a shift from the seller’s market to a buyer’s market, as measured by the shift in bargaining power.