The Coronavirus effect...
Renting a property without paying for it is no longer illegal. McDonald’s and Burger King in the UK are just two examples of a ‘blue chip’ tenant refusing to pay or looking to reduce their quarterly rent payments.
Legal protection for commercial and residential tenants in a number of countries has already been enacted. Due to Covid-19, these tenants are not legally in breach of contract by not paying their rent for 6 months, even if they have the assets to do so.
In other words - some of the most basic premises of investing in real estate no longer hold true.
In many countries, landlords are finding themselves exposed to a legal situation where they cannot evict non-paying tenants. These private individuals and corporations can shrug their shoulders, blame Coronavirus and invite the landlord to commence lengthy and expensive legal proceedings, where the leaseholders claim of ‘Force Majeure’ may be upheld in a court of law. Those landlords, who borrowed money to purchase these real estate assets, will be continuing to make mortgage payments to the bank without receiving a penny of rent.
The Corona crisis has hit real estate hard. The illiquid nature of real estate, the new uncertainty of the income, the impracticality of selling down a percentage of the asset (you cannot sell down 20% of a house) will all have a long lasting impact on this sector. Furthermore, the lack of being able to know an exact value (mark to market) for the investment at any time is magnified during times of crises. There are also large entry and exit costs (legal work, real estate agents, property taxes, etc.).
Stock markets allow clients to always know the current value of their holdings and to be able to sell down a percentage of their assets should they need some liquidity. This can be done quickly, cheaply and easily.
As a wealth manager, I often find clients are deciding whether to invest in the markets or in property. The Corona crisis is pushing many clients with property interests to rethink their investment philosophies.
For those investing in commercial real estate, there is also an added complexity as to the future of office space and retail businesses. Working from home has been viewed as a success by most companies and employees have enjoyed the work/life balance benefits. The move towards ordering everything we purchase online makes one question how much office and retail demand there will be in this new environment.
The real estate landscape has changed beyond all recognition. It will never be the same again. Real Estate investing for the private investor must now be considered high risk.
The writer and Pioneer are unaware of any conflict of interest at the time of publishing the article. The aforementioned should not be taken as an investment recommendation.