The global health emergency of the novel coronavirus disease is now proving to be more detrimental in both its rate of contraction and its effect on global markets than the SARS outbreak of ‘03 and Swine Flu in ’09. With China’s economy more interconnected with the world economy than ever before, it’s no surprise that this pandemic is throwing the majority, if not every, sector into disarray. Regional, microeconomic shifts in logistics and travel, foreign commerce and trade, hotels and hospitality, investments and supply chain economics have evolved into global issues. With entire regions on lockdown and international trade and travel at its lowest volume since 9/11, confidence of a full recovery within the next quarter is shrinking by the day.
It’s critical that lenders are aware of the global effects coronavirus can have, and is potentially already having, on their investments. For this reason, lenders are being proactive in their discussions with borrowers. Consistent communication is key, ensuring proper contingencies are being considered and implemented by borrowers to mitigate as much risk as possible. Here are a few considerations in the various industry sectors based on developments we are seeing in the market.
Hotels and Travel
As quarantines and travel restrictions increase week by week, lenders in both the Americas and EMEA with investments in hotels and hospitality have cause for concern. Though the number of documented cases in both these regions is still relatively low, the effects of steeply reduced business from both leisure and professional travelers from the Far East will continue to heavily impact occupancy rates, rental incomes and, ultimately, the stability of the underlying debt on those investments. Investors should be prepared for the possibility that the volatility of these types of loans could reach levels resulting in default.
Hotel operators are being asked to confirm that they have correct health protocols and contingency plans in place if a guest becomes unwell or reports that they are ill. Many investors are asking their hotel operators to report on the total percentage of revenue coming from overseas, specifically APAC, and to ensure that proper revenue management plans are in place if those revenue streams are suddenly negatively affected.
Retail and Tourism
The outbound group travel ban from China has already taken its toll on the tourism industry and associated travel spending globally. While too nascent to value, retail lenders should expect a vacuum of revenue from these asset types to grow exponentially as potential business and spending continue to dry up.
Service-related businesses that both support and rely on the tourism industry such as restaurants, malls, and souvenir shops may be forced to reduce operating costs. Smaller-scale operators and those unable to adjust accordingly could find themselves at risk of insolvency. For a sector already mightily impacted by the emergence of online retail channels, further reductions in revenues will only exacerbate challenging conditions. These effects could ultimately culminate in increased vacancy rates and leasing incentives resulting in downward pressure on rents and capital values within multiple retail channels.
Lenders have asked their borrowers to provide more frequent information regarding footfall and activity from their retail assets, as well as measures they are taking to combat staff and customer illness.
Education and Student Housing
Universities and other educational institutions have responded to increased travel restrictions by cutting their class loads or simply suspending their semesters altogether. Japan is closing schools to preserve chances for the Olympics this summer and Italy has decided to close its schools and universities indefinitely as well. Several universities and institutions throughout Europe and America have high percentages of Asian students and exchange students, many of which have not returned for spring classes. Student housing bears the brunt of these effects leaving these facilities vacant and without income.
Many borrowers are in the process of game-planning to counteract this potential risk. If travel bans continue to extend into the academic year, the delinquency rates will start to rise and significantly impact the operating income of many student housing facilities.
Student accommodation providers are being asked to reconsider their revenue forecasts for the 2020-21 academic year on the assumption that their student intake will be affected by the loss of overseas student income.
Supply Chain and Raw Materials
Should Chinese imports be materially reduced worldwide, the economic impact on the US and global markets would influence most if not all sectors of the economy. However, these effects would likely only be felt while China is in a state of disruption/lockdown. Investors in industrial warehousing assets must take note of any decrease in Chinese trade and how it impacts supply chain logistics in terms of haulage, distribution, and warehousing, as well as ports and airports.
Lenders need to contact their developers to identify issues they are facing and ensure effective contingency planning especially with regard to raw materials. One symptom that has many lenders worried is shortages of stock in a several different materials due to the slowdown in demand from end-users. China’s demand for coal and iron ore is expected to fall as Wuhan is a key transport hub for both river and rail freight, hindering the receipt and distribution of raw materials. Softening coal and iron ore prices will be particularly impactful throughout the APAC region and in industrial and residential property sectors where employment is reliant on mining.
It is important to note that APACs reliance on China for these types of resources and building materials presents a real risk for anyone looking to kick off a development at present. It is impossible to anticipate the arrival or impact of a global crisis such as coronavirus, but firms can help protect themselves and mitigate the overall effects of the outbreak by remaining vigilant to changing market trends and ensuring that the proper strategies are in place at the ground level.
Dean Harris is Trimont Real Estate Advisors Managing Director, Credit & Asset Management, EMEA. Rebecca Percossi is Trimont Real Estate Advisors Managing Director, APAC. Trimont is a global commercial real estate services provider specializing in the asset management of complex performing and non-performing credit on behalf of commercial real estate lenders and investors.