Sentiment towards global real estate has fallen emphatically among both investors and occupiers following the spread of COVID-19, according to the Q1 2020 RICS Global Commercial Property Monitor.
Globally, confidence among occupiers has deteriorated in the last three months in 33 of the 34 countries surveyed, with the same proportion also now showing negative readings. RICS’ Occupier Sentiment Index (OSI), a gauge of sentiment amongst occupiers, has slipped to -61 this quarter in the UAE from -41 in Q4 2019, which is the weakest reading since 2010, indicating to a further deterioration in occupier demand.
However, the Kingdom of Saudi Arabia, even after seeing a sharp decline in sentiment due to the global pandemic and low oil prices weighing on the outlook, still saw a softer reduction in occupier confidence compared to other countries globally, with the OSI falling from -10 in Q4 to -19 this quarter.
The same trend is evident among investors too. Confidence has fallen in all countries. RICS’ Investor Sentiment Index (ISI), reflecting sentiment among investors, is now in negative territory in majority of countries surveyed, with the UAE recording -41 on the index. Respondents in the country noted a sharp reduction in both domestic and international investor enquiries over the quarter.
KSA saw a slip in investor confidence as well, with the overall investor demand declining slightly in retail and office sectors and the ISI contracting to -2 this quarter, compared to +15 in Q4 2019. However, this was not the case for industrial properties, with investor enquiries remaining steady in this sector over the quarter.
Outlook weaker yet for real estate market
Both investors and occupiers fear that we are not yet over the worst when it comes to the impact on the real estate sector. Looking at the expectations for the next twelve months, in the case of rental values, UAE expects a decline of 5% in headline rents, with secondary retail rents expected to see the sharpest decline. KSA, on the other hand, records highly varied rental growth projections across the sectors, with the most acute rental decline in secondary retail spaces by 4%. Prime industrial sector, however, sees a rise of 2% in rents in the next twelve months. Capital value is also expected to rise to some degree in the Kingdom across most areas of the market, led by prime industrial and office values.
Shift in sentiment in offices most marked, as working patterns shift
While retail is the most depressed across the world, following the impact of global lockdowns, the deterioration in sentiment has been most marked for offices. Anecdotal evidence from survey respondents bear out the sector patterns with some highlighting the scope for agile working to become more commonplace in the aftermath of the virus, lowering the demand for office space. The acceleration in the structural trend towards e-commerce is also noted, with increasing interest in prime logistics space viewed as a likely outcome.
Simon Rubinsohn, RICS Chief Economist, commented: “The impact of COVID-19 on sentiment in the commercial property sector was always going to make for painful reading. However, the erosion in confidence is stark. What’s even more worrying for investors and occupiers alike is that the full extent of the toll it will take on businesses and the underlying economy is still unclear. Given these conditions, respondents are clear that there will be no quick rebound.
Although hard to generalise, this hostile environment makes government support more vital to underpin a global recovery as lockdowns begin to ease. There is also a strong case for a more collaborative approach between landlords and tenants to manage the challenges presented by the current set of circumstances.
What started as a public health crisis morphed into an economic one, and we will see further structural, long-term change as a result of this pandemic. We have already seen the impact on retail as consumer behaviour changed by necessity, and remote working affecting how office spaces are viewed. The ongoing rise of e-commerce and a shift in supply chains towards ‘Just in Case’ is likely to trigger a further change in the investment dynamic.”
Global Commercial Property Monitor
RICS’ Global Commercial Property Monitor is a quarterly guide to the trends in the commercial property investment and occupier markets. The report is available from the RICS website www.rics.org/economics along with other surveys covering the housing market, residential lettings, commercial property, construction activity and the rural land market.