The current difficult period is raising a number of questions. While a number of uncertainties remain regarding this crisis and its consequences, we can offer explanations regarding the repercussions of the current situation on a real estate investment funds such as REAM.
First of all, we must reiterate that the REAM fund is geographically highly targeted, between Luxembourg City and the provinces of Luxembourg, and Namur in Belgium, and that it focuses more on “residential” in its two rental and development sections.
Real estate is an asset like any other, and as such is affected by the generalised correction of all asset classes. While listed real estate funds are currently experiencing major corrections on the stock exchange, the reality for non-listed funds such as REAM is different. In fact, the annual valuation of the portfolio gives the manager more time to guarantee their occupancy rate and the payment of the rents during the crisis. This avoids them having to suffer the speculative panic of a listed market.
Currently, the repercussions of the crisis are being identified and contained for the REAM fund:
– Rents: at present, there is practically no impact on residential tenants. We have a 97% occupancy rate for March and April. The current tenants and new arrivals are all honouring their contract, with one exception. Offices have scarcely been impacted. Shops, which are a small part of our portfolio, are adapting and holding on during this crisis situation. We have agreed with the most affected commercial space, a restaurant, to adapt the rent if necessary and make up the difference over the duration of the lease.
A great deal has been said about the moratorium on rents for traders that were closed during lockdown and about the bank loans of lessors, but there is a degree of confusion about the impact of this moratorium on future rents; in fact, the bank has accepted a temporary freeze on monthly premiums, but interest is accruing and the capital will still have to be repaid, either over an adapted period or via an increase in post-moratorium premiums. What about unpaid rent?
– Developments: building sites are at a standstill, as are current sales, as it is no longer possible to obtain deeds from the notary. This primarily affects the year’s liquidity plan. Most of the charges have also been frozen, as our suppliers are no longer invoicing what they are not able to carry out. However fixed charges must be monitored carefully!
The issue will have little effect on the REAM fund in the coming months, as our stock has been sold in full. We are currently in the study phase of several projects that are due to or will start during 2020 and in particular at the start of 2021. So we will have enough hindsight to plan them to best serve our interests in the coming months, after, we hope, the end of this complicated period.
If you want to know whether real estate purchases will slow down after lockdown… that is very complex question! In our modest opinion, everything will depend on how long the crisis lasts. It is clear that if this is a long crisis and has a significant impact on the households’ income and ability to save, the possibilities of purchasing and investing in real estate will probably feel this.
One important element to monitor will be the evolution of interest rates. If the massive injection of cash into the system (current government trend to aid the economy) creates inflation and ultimately leads to rates rising TOO QUICKLY… Real estate could also correct itself, with the yield spread between rental and risk-free rates no longer enough in the eyes of investors. But if this increase in rates is more GRADUAL, inflation will apply to rents and the value of properties will not be too badly affected.
It should be noted that for rentals, our fund has a FIXED rate debt over an average of 14 years. We are therefore protected from an increase in the interest rate. In addition, the gross rental return of 7% of the portfolio also provides significant protection from a slight rate increase.
We will tell you about it soon, at a more positive time. Until then, stay well!
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