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European property sector puts faith in lessons learned as lockdown gloom returns

SNL ImageRestaurants in the U.K. will be only allowed to serve takeaway or deliver food as part of the government's new national lockdown restrictions.
Source: Getty Images Europe

Europe is in lockdown once more. The U.K. became the last of the region's major markets to reenter nationwide COVID-19 restrictions Nov. 5, joining Germany, France and several others scrambling to stem surges in the spread of the virus.

The severity and length of the measures vary across jurisdictions according to the scale of the threat posed by the virus. In the U.K., which has recorded the largest death toll in Europe, the government has encouraged people to remain at home unless they have a specific reason to leave. In Germany, where the first wave of the virus had a relatively minor impact, a partial lockdown allows attendance at church services and protests.

The return of national lockdowns is bad news for large parts of the region's property sector. Once again, non-essential retail, hospitality and leisure are likely to bear the brunt of the measures as governments strain to minimize all unnecessary contact between members of the public.

Still, the shock experienced in the spring isn't expected to be repeated. "There have been lessons learned from the first lockdown," Andrew Angeli, European head of real asset research at CBRE Global Investors Ltd, which has a $113 billion worth of property assets under management, said in an interview. "Government ministers and the property industry have learned from that very challenging experience, so it's not going to be copy and paste."

The impact of the first national lockdown in February and March on Europe's property sector was considerable. Governments spooked by the rapid spread of the then little-known virus imposed far-reaching restrictions on social interaction and business activity, leading to the closure of all kinds of property.

Restrictions on movement across the continent, and widespread uncertainty about the economic impact of the pandemic, saw investment in European commercial real estate plunge by 38% to €43.9 billion during the second quarter, according to real estate services firm CBRE. Demand for space from businesses looking to move or expand suffered a similar hit.

"We can get deals done"

The second wave of national lockdowns across Europe is unlikely to stunt investment as it did earlier in the year, said Angeli. "From the point of view of investing capital and doing deals, investors are maybe less concerned about the practicalities of investment," he said. "We've shown that we can get deals done."

Countries that have kept the virus under relative control since the spring, such as Germany and Switzerland, appear to have benefited most from this investor resilience. Commercial property investment volumes in Germany, Europe's largest real estate investment market in 2019, rose by 10% in the first nine months of 2020 compared to the same period the previous year, a CBRE report said. Switzerland saw a 24% increase in investment activity during the same period.

Germany's management of the virus has helped insulate its listed property sector from the damage suffered by peers in Europe's two other largest markets. Total returns from the country's listed property sector have outperformed the market generally since the beginning of the pandemic, while property stocks in the U.K. and France and been worse hit than the wider market, according to data from S&P Dow Jones Indices.

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Europe's property sector has worked hard to adapt to the demands of operating in a pandemic since the initial shock of those first-wave lockdowns, said David Greenbaum, CFO of Luxembourg-listed CPI Property Group SA, which owns a €9.8 billion property portfolio across Central and Eastern Europe. "There are more procedures in place, there's more [personal protective equipment], there's more understanding of the disease, and people just want to get on with life," he said.

The financial and operational challenges posed by the first-wave lockdowns and the pandemic generally have also strengthened relationships between landlords and their occupiers in many cases, according to Axel Drwenski, head of research at German investment and asset manager KGAL GmbH & Co. KG, which has €7 billion of real estate assets under management.

"The pandemic brought us, the landlords, and the tenants closer together," he said. "We are better prepared for the second wave than the first one."


Still, the new national lockdowns are another massive blow for some landlords and their tenants. A common target across the new regimes are leisure and hospitality businesses such as hotels, bars, restaurants, cinemas and gyms, which have been among the hardest hit since the pandemic began. "Leisure and hospitality are in the crosshairs," said Angeli. "They've had the greatest burden placed on them in terms of operating hours lost."

The new lockdowns have also tempered some of the optimism that had returned to the region's property sector, Angeli added. "It certainly feels we're moving in the direction of certainly a softer Q4 and Q1 [2021] than we had anticipated, and that is going to impact occupier sentiment, it's going to delay occupational decisions," he said.

The share prices of property companies listed in Europe's three largest markets fell following the announcements of new national lockdowns. French property stocks fell 5.1%, while Germany's partial lockdown measures prompted a 3.5% fall in property stocks there. U.K. property stocks fell by 0.3% when trading opened Nov. 2 after the government's weekend announcement.

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Despite the prospect of a tough winter ahead, the property sector's ability to adapt and live with the virus has many landlords and investors already planning for a post-pandemic world, said Greenbaum. "Short term there will continue to be pressure on parts of the real estate sector, on certain kinds of companies," he said. "On the other hand, a lot of people are beginning to look past COVID."