The shape and depth of the post COVID-19 downturn is uncertain, but a severe recession looks unavoidable. We are forecasting a fall in GDP of over 10% in 2020, with a robust rebound once a medical path out of the pandemic has been found. Success here, and measures taken to control transmission rates in the interim, will determine how protracted the period of economic downturn will be and the speed of the subsequent recovery.
The lockdown has impacted different parts of the economy and real estate sectors to varying degrees. Retail, leisure, and some operational asset classes - hotels in particular - have felt the full impact, whilst the industrial sector has demonstrated resilience. We also expect recovery rates, whether V, U or W – shaped will vary greatly between asset classes.
From discussions with our lending clients, a clear theme is that High Street banks in particular, have been focussing their attention on supporting existing customers, through loan extensions, covenant waivers and providing flexible solutions in the immediate short term. However, how long this strategy will continue is unclear.
Many lenders are in a far better position to cope with the impact of the current crisis than was the case in the aftermath of the GFC, with healthier capital ratios and more conservative levels of gearing across their loan books, affording greater flexibility to deal with problems.
There have been suggestions that the Bank of England may be storing up problems for further down the line, creating elevated levels of re-financing risk for some borrowers. Will lenders be prepared to continue with 6 – 9-month loan extensions and waivers? Some debt funds may be facing more immediate decisions with some of their loans that were originated at higher LTVs, and perhaps having taken positions higher up the lending risk curve where attractive returns were available.
So, will we see lenders taking action later this year? The feedback we have had is that it remains comparatively early days. Lenders are reviewing their loan books internally and focussing on the likely problem sectors of retail, leisure, hotels and residential development in particular. Many lenders will face issues with loans secured on shopping centres which were under stress even before the COVID-19 crisis. These assets have seen severe income disruption, with further tenant stress, and outward yield movements of 400 bps in 12 months in some cases and corresponding value falls as investors have retreated from the sector. The challenges facing Intu have been well documented for some time.
Whilst a financial crisis of the magnitude of the GFC is not expected, the road ahead is uncertain. Lenders and borrowers alike will undoubtedly be facing some difficult decisions in the coming months, as the flexibility afforded thus far may not be sustainable indefinitely.
Where there is clear visibility of forthcoming financial and operational stress, early identification and action is key. Planning is vital at this time, and crucially where existing third-party financing arrangements are in place a clear strategy is needed for discussions with lenders and stakeholders.
At CBRE, our Valuation Advisory Services team has been working closely with our Debt Advisory and Loan & Corporate Recovery colleagues to provide a fully integrated solution for lenders and borrowers who may face difficulties as the fall out of the COVID-19 crisis takes its course, by providing assistance in three key phases through the downturn. These involve strategic reviews initially, before advising on optimisation strategies and finally offering due diligence support to loan sales. The advice is tailored at portfolio, asset or sponsor level.
With a breadth of expertise across CBRE including Valuation, Capital Advisors, and Sector Specialists we are able to help guide management teams, providing clear strategic insights and deliver creative and tailored solutions to the problems facing lenders, investors, developers and operators.