March 24, 2020
Today I received another e-mail about Covid-19 this one from Reivest24
E-mail from Reinvest24
The coronavirus pandemic has put the world’s economy on pause. Will it be a temporary lockdown, or will the world’s economy find a way to function together with the virus? It is hard to evaluate the consequences of these events yet, but it is great to be aware of the challenges before it is too late. Here’s Reinvest24 take of the current situation.
At Reinvest24 the risks have always been our top priority when it comes to selecting the investment projects. Since the very beginning of the platform’s launch, we were sure that at some point we will face a period of crisis and we have always considerate that when choosing an investment property. This is why Reinvest24 has been focusing on real estate equity and not loans, as rental properties will be more sustainable throughout the market cycle´s. We have published many blog posts about this topic in the past and we highly recommend you to read the post we published a year ago.
An update on real estate market situation
We have been observing the real estate market in Tallinn very closely and here are some of our conclusions on the impact that the current situation is having on the market:
Considering the fact that living spaces are one of the primary needs of humans, no viruses or economic recession will take away the demand for them. Of course, it does not mean that short-term corrections on the market cannot occur.
Before the pandemic started, the demand for apartments was clearly higher than the supply in Tallinn. For example, new developments were mostly sold out even before they were finished. Currently the biggest risk factor on the market is coming from the AIRBNB short-term apartments. In 2019 the total offering for short-term apartments in Tallinn increased from around 1500 to 2500. Within the past 1-2 weeks this number has dropped around 300. Instead of short-term rent, the apartments are on the market for long-term rent. If this lockdown continues and tourism high season gets cancelled in Tallinn, then a lot more of the AIRBNB apartments will be switched from short-term to long-term rent. The increasing supply will create a huge pressure on the long-term rental apartments market in Tallinn. This has been one of the reasons why we have mostly focused on commercial properties.
On the other hand, if we compare the current situation with the housing crises back in 2008-2009, then the big difference is the source of the crises. This time it is not coming from bad quality mortgage loans, overvalued collaterals or even not from economic problems, but from something totally different. The crises can grow into all of those problems, but currently it is not coming from the rapid decrease in demand, it is actually the opposite. While the countries have closed their borders and the factories are shut down, it has caused a shortness in supply and the banks are evaluating the situation differently. The banks in Estonia have stated that they will not start to aggressively liquidate the default mortgages loans, but rather give the loan owners who lost their income a grace period to recover. Another take from the previous crises is that when the number of property sales drop, the demand for rental properties will increase. So most likely the pressure that is coming to the rental market from AIRBNB apartments will be temporary.
Obviously, the retail spaces that are dependent on the tourism sector are under big pressure. There are a great number of smaller size businesses who are already facing some difficulties. As of today, we have only one this kind of property – the Restaurant property. One of its biggest advantages is that they are not dependent on tourists and are rather targeting the local Kadrioru high-income residents. Besides, the owners of the restaurant have been through the 2008 crises and manage to come out of it successfully.
This is also the sector that the governments are focusing on the most and currently putting together “help packages” in order to help them survive this stagnation period. These “help packages” simply mean that the central banks will be increasing the supply of money. The Federal Reserve with $4 trillion financing program and European Central Bank with €750 billion emergency purchase program. The bigger picture is that in long-term this will create inflation, that will result in increasing value of assets like real estate. Read more about this topic from one of our previous blog post.
Regarding to commercial spaces like offices, we don’t see that the impact will be big. Especially, when talking about the properties where the tenant is an established tech company. The current period could actually trigger a huge growth for online businesses. With the current lockdown a lot of people are working from home and some offices are not being used, but this trend will be temporary as we don’t see that the current situation will reshape the work culture. What will most likely happen is that the older office buildings that are in bad contitions, will be struggling to stay in competition with modern ones and could face some vacancy.
What about us?
Reinvest24 is an online business and we are fully functional even if this lockdown remains for a longer period. Our dream team is working from home, thus continuing to ensure the best service and support to our investors.
We believe that this situation may give us an opportunity to find better deals that were not on the market during the high growth times. For example, the latest investment property would not be on the table at this price level without the current situation. These days we see, that mentality of businesses starts to change and instead of investing into real estate for their offices or business, they now prefer to rent and invest money into their business, either buying better equipment or investing into new technologies. Some businesses will be selling their real estate to free some capital in order to cover operational expenses or to invest in expansion. All together these aspects will increase the rental demand for office spaces, just like it did in the last crises. And we will be there to offer you the best secure investment opportunities.
Stay safe and prosperous!