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EN
30.03.2020

A viral crisis on the real estate market: how to make profit from it.

Alexander Sharapov, Vice-president of Becar Asset Management
The hotelier has pain, the restaurateur has pain, the investor has pain, and the coliving has not pain - jokes are jokes, but this is how post-crisis "apocalypse" on the real estate market can look like. Alexander Sharapov, President of Becar Asset Management, shared his thoughts with the “RIA Real Estate” website about the players for whom the crisis will be a time of opportunity and who will call in sick.

Panic demand

The crisis on the real estate market has not come yet, but all the expectations are very tense. As always, it started with the fall of the ruble and shares. We are now seeing a repeat of the situation in 2014 on the real estate market: there is again a surge of interest, people want to invest depreciated rubles in real estate. At the moment a wish to buy studios and studio apartments have increased significantly, by about 40%. The demand for apartments has grown by about the same amount. And, probably, a little more, by 50%, demand for the rooms purchase in apartment hotels has increased. It's amazing because, for example, hotels aren't doing well. However, unlike them, apart-hotels focus not only on tourists, but also on medium-term accommodation, for which the demand has not fallen, but on the contrary, has increased. This increase can be explained by the fact that some people who lived with elderly parents try to isolate themselves from them. So many people aged 20 to 40 years have now started looking for studios or apartments for 2-3 months. It is interesting that we see the same surge in demand for suburban real estate. But this is not for young people, but just for the elderly, who wanted to survive the situation out of town.

As in 1998, 2008 and partly in 2009, as well as in 2014, I think this surge in demand will last several months. The situation may develop further in two scenarios. In 1998, the market grew in rubles. If oil continues to trade at the same levels, I think that real estate will repeat this scenario. At that time, the price increased (in rubles) in a very short period of time. In dollars, of course, it got cheaper.
In 2008-2009, when the ruble fell down and then slightly increased, real estate began to lose the ruble price after about 6 months. Both scenarios are possible. At the same time, the probability of realizing each of them depends to a greater extent on the ruble exchange rate and how deep oil will fall. I hope, of course, that oil has fallen so deeply for a short period of time. With the dollar price of 94 rubles, which the Central Bank put in its stress scenario forecast last year, I think real estate prices in rubles will rise by 10-15 percent.

Not everyone will survive.

If you look at the Wuhan experience, where quarantine lasted three weeks, this property will survive. However, it is already announced that several hotels in Moscow, for example one of the Ibis hotels, and several in St. Petersburg, will be closed. If the epidemic lasts much longer and the tourist market does not recover by summer, then apartment hotels will be reoriented to medium-term accommodation and will feel very good. But if this situation persists, we may see the bankruptcy of the first hotels in two or three months.

In addition to the hotels that are already intended for tourists, two other segments may be affected. First of all, it is the restaurant business. Now restaurants are already trying to break rental agreements referring to Moscow mayor’s worlds that the coronavirus is a force majeure.

Another segment is a retail. In Russia, there has already been a decline in demand in the non-food segment. Micro shopping centers where attendance is not so high are more or less feeling well, and super regional shopping centers are already empty.

Real estate investments will also fall. An amount of transactions during a crisis usually drops by 20-25 percent. If in the last year it was about 3.8 billion dollars, this year it will be about 3 billion or even closer to 2.5 billion. At the same time, the deals will only take place in the segment of small and medium-sized facilities.

Many people have sent their employees to homework, and this decision already a makes situation in the office segment difficult. In conditions of complete instability, long-term lease agreements have become uninteresting. At the same time, covorkings suddenly began to experience greater demand. Employers, abandoning classic offices, began to turn to flexible ones, understanding a necessity to keep a certain number of jobs.

Class A will suffer the most. The big advantage of this segment was its basement on long-term contracts. However, I think that they will be terminated with reference to force majeure, which is recognized as an epidemic of coronavirus. And the question is how the courts will react to that. The owners of class A business centers, being mostly heavily loaned by banks, are not so flexible in negotiations. At the same time, the owners of class B offices are more flexible in terms of rent revision and reduction of occupied space. Of course, I admire how the owners of such business centers as “Romanov Dvor” and “White Gardens” still manage to keep the rate in dollars. But I think that now such rare goldfish will have to switch to rubles as well.

Eternal income.

At all times, even during the crisis, real estate has generated income. All over the world pension and insurance funds invest in real estate when all stocks and bonds become cheaper. Coliving is very popular all over the world as people see that there is nothing more stable than a house for rent.
Many entrepreneurs have felt the decline in revenues from their main businesses, some of which already make loss. Trying to secure themselves from the rent flow, they are looking for opportunities to invest abroad. Knowing that we work in Dubai and London, they ask us to help them buy something rented there. We're talking about amounts between a few million and a few tens of millions of dollars. Many people argue reasonably: seeing the problems in the hotels, they ask us to find them some options to buy in this segment when the market starts to recover. They really want to "pick up" interesting facilities when the price reaches the bottom.

Problems and opportunities

Now we see a short-term increase in property prices by developers. Their main task now is to accumulate resources and additional airbag. If there is a lull, they should have enough money to continue successfully building and completing the facilities. That is why the developers, who are doing well with the sales of the facility, have no loans and own a land, have intensified their search for project financing.

In order not to have mass bankruptcy in the country, the state needs to work out the issue of preferential lending to the industry. Today state banks offer business loans at the rate of 7% to 10.9%, and we would like it to be at the level of 2-3%. The fact that developers can receive project financing was mentioned long ago, but in fact it is very difficult for an average or small player to get it.

Also, the development market would benefit from a reduction in the amount of funds that lie on bank escrow accounts. Now 100% of the money coming from individuals is deposited. There's unique case in the world. It's usually 20-50% by stage of construction.

As you know, crisis is a time of opportunities. If we talk about the points of growth that may rise in the near future, it is worth turning to the experience of 1998, 2008 and 2014. Those who are too lenient will have to lose money. They will sell their assets at a big discount.

As in the previous crises, many real estate objects and development projects will go to banks. As a result, banks will offer again to buy this property at a lower price, that will increase an amount of distressed-assets.

I hope that banks will stop considering that it is possible not to involve developers, consultants, and brokers in sale of such assets. You can remember Bank Trust, where assets worth billions of dollars were transferred. Many of them date back to 2008 and have never found their owner. So now it would be much more reasonable to invest such assets to the developers in development of projects that have shown their stability. And in this case, we are talking about covorkings, under which the old offices can be converted and aparthotels, to which old hotels need to be converted. We are also talking about developing colivings.

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