Excerpted from a report by S&P Global Ratings
COVID-19 is now present in most countries, and S&P Global Ratings estimates it will materially affect GDP growth and companies’ revenue prospects. Most governments have announced measures to contain the virus’ spread and support companies under financial stress. However, real estate developers and homebuilders are feeling the pandemic’s effects.
Given the weaker market fundamentals, we have updated our operating assumptions for our 11 rated property developers we follow in EMEA. We have therefore taken eight rating actions: two downgrades and six negative outlook revisions or CreditWatch placements (see table).
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Darker Economic Prospects Should Hamper The Demand For Newly Built Properties
Property development activity is highly correlated to countries’ economies, in particular their GDP and employment prospects.
The eurozone and U.K. are facing recessions due to the pandemic. We expect GDP to fall about 7.3% and 6.5% on average in the eurozone and U.K., respectively, this year (for more information, see “COVID-19 Deals A Larger, Longer Hit To Global GDP,” published April 16, 2020, on RatingsDirect) due to economic fallout from the pandemic. We expect a gradual rebound of 5.6% and 6%, respectively, in 2021.
In the United Arab Emirates (UAE), we expect negative pressure on GDP and employment across most key sectors such as tourism and retail, as well as for some small and midsize enterprises, all of which could weigh on demand for new properties. The real estate sector is an important part of the UAE’s activity. The current supply-demand imbalance in the sector, particularly in Dubai, has been exacerbated by the pandemic’s effects. We now expect to see international demand for property in UAE to be subdued and the fall in residential prices to be steeper than we had expected, and lingering well into 2021.
With that in mind, we believe the overall demand for newly built properties will diminish in 2020 as the situation of buyers could significantly weaken. We expect that higher unemployment or lower disposable income would inevitably lead to cancelled sales and lower prices. Demand from institutional investors might also weaken in our view, especially in the case of built-to-let schemes, where the success of leasing has become very uncertain. This is despite sales reservations perhaps bringing somewhat temporary increases in the most cash-based transaction markets, given the lack of safe alternative investments.
In Russia for example, COVID-19’s impact on developers could be slightly lower, because real estate might be perceived as a safe haven in the context of low oil price, a weaker ruble, and recently increased taxation on deposits. But we believe this effect could be temporary, given that a weaker overall economy should still progressively compress demand. We think banks’ openness to buyers and access to mortgage will also be a key determinant of the impact on demand. In the UAE, for example, governments have raised the maximum exposure banks can have to the emirates’ real estate sector and eased terms on mortgage loans for first-time homebuyers.
Social Distancing Measures And Lengthening Administrative Processes Are Holding Property Developers’ Offer
In most EMEA countries, construction is allowed, and even supported, as long as workers’ health and security are guaranteed. In practice, many construction projects were halted because these conditions are difficult to meet and the measures to limit social interactions are forcing subcontractors to temporary close their business or sometimes chose to even end the contract under Force Majeure clauses. In the U.K. for example, about 80% of new housing construction is on hold, according to market reports.
We believe this is creating supply chain disruption and important delays in the sector. Moreover, governments’ bans on cross-borders travels could exacerbate the lack of available workers and subcontracting services, which in turn will likely result in delays and inefficiencies for property developers.
In the meantime, in most countries, marketing and commercialization continue online for the most digitalized property developers, allowing them to get through the backlog of reservations. But the sales realization rate is getting constrained by heavier administrative processes, whereby notary acts and property registers are getting significantly more complex to access and execute.