COVID-19 IMPACT ON REAL ESTATE - WEEKLY PWC EXPERT SESSION VIA WEBCAST 15. APRIL 2020, 10:00-11:00 AM - PWC BLOGS
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COVID-19
Impact on Real Estate
Weekly PwC Expert Session via WebCast
15. April 2020, 10:00-11:00 am
Topics:
• Scenarios Real Estate - today: Retail sector
• Movement in the Retail & Consumer sector
• Business Recovery in sight yet? Banks at the limit
• Clients and contractors: delays on construction site?
• Legal perspectives on potential opening scenarios
• Accounting - valuation, business recovery and supervisory board
• Q&A session
Registration via LINK: https://www.pwc-events.com/Covid-19-Impact-Real-Estate
Questions to the PwC experts via e-mail to: de_covid19_pwc_real_estate@pwc.com
Updates and further informationen on https://blogs.pwc.de/real-estate/
© 2020 PricewaterhouseCoopers GmbH Wirtschaf tsprüfungsgesellschaft.
Alle Rechte v orbehalten. "PwC" bezeichnet in diesem Dokument die PricewaterhouseCoopers GmbH Wirtschaf tsprüf ungsgesellschaft, die eine Mitgliedsgesellschaf t
der PricewaterhouseCoopers International Limited (PwCIL) ist. Jede der Mitgliedsgesellschaf ten der PwCIL ist eine rechtlich selbstständige Gesellschaf t.
Susanne Eickermann-Riepe
Partner, PwC Real Estate Leader Germany
susanne.eickermann-riepe@pwc.com
Dr. Christian Wulff
Partner, PwC Retail & Consumer Leader, Germany
christian.wulff@pwc.com
Christiane Conrads LL.M.
Head of German Real Estate Desk, London
c.conrads@pwc.com
Thomas Veith
Partner, PwC Real Estate Deals Leader Germany
thomas.veith@pwc.com
Dirk Kadel
Partner, PwC Real Assets, Germany
dirk.kadel@pwc.com
Dr. Frederik Mielke
Director, PwC Assurance Real Estate, Germany
frederik.mielke@pwc.com
Dr. Philipp Pröbsting, maître en droit
Senior Manager, PwC Legal Real Estate, Germany
philipp.proebsting@pwc.com
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 2
Real Estate Scenarios – will
there be winners and losers?
Real Estate - Markets. Assets. Player.
• Real Estate Capital Markets - MSCI Global Diversified Real
Estate clouded especially for Commercial Real Estate (returns -
40% or Index -15), in Deutschland gleicher Trend (returns – 35%
or Index -5)
• Real Estate Markets to watch - No indication yet as to which
European city (Emerging Trends 2020) will suffer most, but
"Future Cities" will have to reassess opportunities and risks in the
face of the "pandemic" challenge
• Assetklassen – There is hardly an asset class that does not have
to react to the pandemic risk in the short, medium or long term,
which is why we set the perspective at step by step scenarios and
effects - today it is the retail real estate
Susanne Eickermann-Riepe
• Real Estate Player – The partners of the real estate industry and
the market participants within the different phases of the real Partner, PwC Real Estate Leader Germany
estate life cycle are affected differently - taking a look at this topic susanne.eickermann-riepe@pwc.com
is also interesting
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 3
Scenarios and effects - Which asset class suffers how much and what
consequences are to be expected?
Which scenario will be the basis for further planning? PwC determines the effects of COVID-19 for 16 industries
Best Case (V Shape) Base Case 1 (U Shape) Best Case 2 (W Shape) Worst Case (L Shape)
False Alarm Measured Recovery Volatile Recovery Prolonged Event
Scenario
• Reduction of mid-term • Continuing recesion: Return • Economic recovery begins • Continued recession poses
growth to earlier GDP levels after in part a drastic threat to the
Impact
• Shift of investment and several quarters • Reduction of medium-term economy
consumption (no • Impairment of performance growth: return to earlier GDP • Return of total production
reduction) and growth (at least two years) levels only quarters after the to pre-Covid-19 level not
• Shift/Limitation of investment last Covid-19 outbreak foreseeable
& consumption • Reduction in consumption • Strong influence on
and investment (partially) investment and consumption
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 4
Supply and demand shock: retail properties, hotels and restaurants
particularly affected - office transformation accelerated in the medium term,
residential hardly affected
Retail (non-food), hotels and restaurants are clearly affected - market adjustment and repurposing
Social distancing Hygiene standards Travel restrictions Entrance restrictions Infection risks Supply shock Demand shock
Climate of Change – but
Retail
contrary to the November 2019
forecast for 2020 (Emerging
Trends in Real Estate Europe
Hospitality 2020)
Restaurants / Bars
Event-Locations
Logistics
“Generally we are repurposing
Office shopping centres into mixed
residential and employment
space, making co-working part of
Residential mixed-use schemes to drive
activity back into town centres”
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 5
First effects are becoming apparent - but the corona effect has not yet
reached the historic low in the financial crisis (December 2008: 42.2 points)
Significant shock - German Hypo Real Estate Climate Index falls by -37.3%; 72 points
Retail Logistik Hotel Office
Smart Cities - What will they look like in the future?
Work. Live. Play.
Financial- Corona-
crisis crisis Connectivity Mobility Sharing Security
Quelle: Bulwiengesa AG: „Immobilienklima April 2020“
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 6
Retail had a hard time even
before the Corona crisis - now
things are getting serious
Current actions
• Code of Conduct - German Council of Shopping Places (GCSP)
• 7 open questions from perspective of Austrian Retail
Association – opening scenarios and restrictions
• 10 Bullet-Plan of the HDE (Handelsverband Deutschland)
Future scenarios
• E-Commerce remains strong – Boom in Digitization
• Food Retailing – Stay home, we deliver! Pay digital!
• New Non-Food strategies - Go asset-light? Short-term rents?
• Small and medium-sized cities - between fear and hope
• Metropolitan Areas – Connectivity. Health. Security. -
Restrictions on further consequences?
Susanne Eickermann-Riepe
• Pressure on sustainability remains – major challenges for CO2
footprint in food and non-food retail Partner, PwC Real Estate Leader Germany
• Tenant – landlord – dilemma: Who will invest?
susanne.eickermann-riepe@pwc.com
• Problems remain – despite and after Corona crisis
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 7
Retail & Consumer Sector:
Food is booming – Non-Food is
suffering!
Impact
• Food - The massive increase in demand for certain everyday
items is leading to temporary gaps on the shelves of some
supermarkets. Some of the currently visible changes are short-
term crisis phenomena. However, the pandemic will also trigger
developments that will permanently change the retail:
− Discounter regain market shares
− Delivery models are established sustainably
− Product packaging experiences a Revival
− Digital payments are gaining ground
• Non-Food - Situation for retailers hadn't been easy before the
Corona crisis, but the loss of sales increases the pressure
significantly. Digital channels are often developed insufficiently Dr. Christian Wulff
and the demand for non-food tends to decline in times of crisis. Partner, PwC Retail & Consumer Leader,
The customer will determine which business models will prove Germany
themselves in the future. christian.wulff@pwc.com
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 8
AS OF MARCH 31st, 2020
Positive effects for food retailers, as shops remain open during
the crisis
Industry impact: Consumer goods & retail (food) Impact1): POSITIVE
V-Scenario (mild) U-Scenario (severe) L-Scenario (fatal)
YoY Growth [%] Delta to base case [ppts]
+0.4 0.0 0.0 +0.4 0.0 0.0 +0.4 0.0 0.0
ppts ppts ppts ppts ppts ppts ppts ppts ppts
3.0 3.0 3.0
2.5 Base Case 2.5 2.5
2.0 2.0 2.0
1.5 1.5 1.5
1.0 1.0 1.0
0.5 Scenario 0.5 0.5
0.0 0.0 0.0
2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022
Companies included: Overall rationale:
• Retail trade (food and food-related) • Positive momentum for food/ food-related goods as stores provide essential goods that remain accessible even if the
• Grocery and speciality food stores outbreak worsens (grocery stores will likely remain open throughout crisis)
(incl. beer, wine, liquor) • Consumers substitute restaurant/ canteen visits with food from grocery stores and food delivery
• Food and beverage manufacturers • Food and beverage production will continue during crisis (in some sectors even with higher output due to increasing
demand for locally produced goods), as industry has been categorized as critical infrastructure
• Fast lane for food logistics has been agreed within the EU to secure cross-border food supply chains
1) Impact Scale: Positive = More output/ growth than w/o COVID-19 | Neutral: Normal 2020 growth; no COVID-19 impact | (Slightly/ Very) Negative: (Much) less output than w/o
PwC Real Estate | COVID-19 WebCast COVID-19 15. April 2020
PwC Source: Strategy& analysis 9
AS OF MARCH 31st, 2020
Non-Food retail clearly threatened, closed and at the same
time consumer demand is restraint
Industry impact: Consumer goods & retail (non-food) Impact1): VERY NEGATIVE
V-Scenario (mild) U-Scenario (severe) L-Scenario (fatal)
YoY Growth [%] Delta to base case [ppts]
-9.6 +1.1 +1.2 -11.7 -1.3 0.0 -14.8 -2.5 -2.5
ppts ppts ppts ppts ppts ppts ppts ppts ppts
Base Case
4.0 4.0 4.0
2.0 2.0 2.0
0.0 0.0 0.0
-2.0 -2.0 -2.0
-4.0 -4.0 -4.0
-6.0 Scenario -6.0 -6.0
-8.0 -8.0 -8.0
-10.0 -10.0 -10.0
-12.0 -12.0 -12.0
-14.0 -14.0 -14.0
2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022
Companies included: Overall rationale:
• Retail trade for non-food goods (incl. • Non-food retail, especially apparel, hit hard during lock-down in terms of demand; additionally supply chain disruptions
online retail) (esp. sourcing from China); online retail will not compensate for demand break-down
• Furniture, electronics, appliances, • More negative effect on industry output if broadening outbreak causes drastic overall demand break-down, as the
building material, apparel, etc. industry performance is closely tied to consumer activity
producers • Demand for soap, detergents, cleaning products and personal care stable as sales channels (supermarkets, drugstores)
• Personal care producers and beauty remain open during the crisis, but no significant impact on overall industry due to low share of retail sales (around 3%)
stores
1) Impact Scale: Positive = More output/ growth than w/o COVID-19 | Neutral: Normal 2020 growth; no COVID-19 impact | (Slightly/ Very) Negative: (Much) less output than w/o
PwC Real Estate | COVID-19 WebCast COVID-19 15. April 2020
PwC Source: Strategy& analysis 10China: Significant decline in sales in all categories, growth only in the
food segment - furthermore online
China’s retail sales development
Total Retail Trade Online Retail
Retail sales per category, in % accumulated growth, as of February 2020 26%
10%
-14%
-18%
-20%
-33% -34%
Online Online
Apparel & Home & Electronics Health & Food & Apparel & Food &
Footwear Furniture Beauty Grocery Footwear Grocery
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC Source: Chinese National Bureau of Statistics, Strategy & analysis 15 11Business Recovery already in Subsidie
sight? Banks at Limit
Developments on the transaction/financing market
• Banks have little space for adjustments due to high capital
requirements. Focus on promotional loans. Operational
capacities at the limit.
• Screening of loan portfolios. Active analysis of hotel, fashion
and non-food retail financing. Fair Financing
• So far (still) small restructuring of PropCos. Leeway for
valuations, covenants, repayments. In fact, no new
commitments or additional disbursements.
Bank Landlord
• Significant increase in demand for mezzanine capital
expected (project developers and increasingly portfolio
owners).
• In U or L scenario: preparation of (re)financing together with Thomas Veith
funding experts and scenario analysis. Partner, PwC Real Estate Deals Leader
• Survival forecast or "Quick Check" based on business thomas.veith@pwc.com
planning creates transparency and the basis of EU
requirements for "companies in difficulty".
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 12Delays in construction projects
due to COVID-19
Causes for delays in construction time
• Building owner:
− Grant of permission and procurement of plans
− „corona compliant“ construction site
• Contractor:
− Recruiting and procurement of material and equipment
− „corona compliant“ construction site
Delay on part of the contractor
• On delay, if consequence of COVID-19 and no other avoidability
• But: Contractors must try to minimize the effects within the
bounds of reasonableness.
• Caution: Regarding promised deadlines, be awar of COVID-19!
Delay on part of the building owner Dr. Philipp Pröbsting, maître en droit
• Potential claim acc. to § 642 BGB (no-fault) Senior Manager, PwC Legal Real Estate, Germany
philipp.proebsting@pwc.com
• BGH (30.01.2020): Calculation of the appropriate
compensation by weighing, if necessary judicial estimation
• Quantification and enforcement may be difficult/uncertain
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 13Legal perspectives of possible
opening scenarios
Challenges in regards to Retail Real Estate
• Since the middle of March 2020, some of the orders of the
federal states have been changed several times and differ
from one another;
• In particular in the case of the "second or third wave", further,
partially different adjustments are to be expected at state level;
• Legal verifiability is uncertain;
• Regulatory law serves to avert danger: official orders and
opening scenarios are aligned to the - permanently changing –
situation of infections and medical care;
• Contradictory positions of landlords and tenants.
Christiane Conrads LL.M
Head of German Real Estate Desk, London
c.conrads@pwc.com
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 14Legal perspectives of possible Tenant
opening scenarios
Recommendations for contract drafting/design
• Consideration of different interests;
• legally compliant regulations on operator responsibility
including documentation (increased need for regulation and Faire and flexible
action by landlords, tenants and FM); contracts
• Adaptation of emergency plans and measures;
• Balanced and sufficiently specific regulations in supplements Facility
to rental and FM contracts that offer sufficient flexibility; Landlord
Manager
• Observance of the legal requirement of written form;
• Use of the interface function of FM; Operator Responsibility:
• Focus on digitisation and ESG. Operator responsibility:
Duty of conduct under tort law to prevent and avert danger to life, limb
and health by securing sources of danger when using and operating
real estate
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 15Implications of the crisis for
valuation and impairment
testing
International Monetary Fund - biggest economic
crisis since the Great Depression in 1929
• Optimistic scenario:
Economic growth
Germany -7% in 2020
and +5% in 2021
• The real estate climate is
also crashing…
Dirk Kadel
Partner, PwC Real Assets, Germany
dirk.kadel@pwc.com
Retail climate lower than Logistics climate shows Hotel climate with significant Office climate loses pole
after the financial crisis hope and stability decline position
Quelle: Bulwiengesa AG: „Immobilienklima April 2020“
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 16Triggering event for impairment testing?
For many companies, market capitalization is below
Impact on impairment testing
the book value of equity
• The number of companies in the STOXX Europe 600 with a • Impairment risk exists both for goodwill from previous
market capitalization below the book value of equity has transactions and for the value of the assets
almost doubled since the end of 2019 • Certain effects on the valuation are difficult to predict at
present, but initial analyses of capital market data show a
significant increase in the cost of capital due to the Corona
crisis:
• Across all industrial sectors up to approx. 5% surcharge on
the cost of capital
• In real estate approx. 0.5% to 2% surcharge
• Additional risks due to lower cash flow
Highly simplified
example calculation „Pre Corona“ „Post Corona“
Cashflow p.a. 100 100
ROI 5% 7%
Quelle: S & P Capital IG; PwC Analyse“
Value 2.000 1.400
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 17Accounting valuation of company
shares and restructuring from Q1
2020
Valuation of company shares (IFRS/HGB):
• Differentiation between valuation of individual assets vs. financial
assets/companies:
• Declined stock market price < book value
=> indication of impairment
• Assessment of existing enterprise- or company value resp.
CGUs
Requirements for recognition in the balance sheet
restructuring (IAS 37.14; 37.70ff.)
• Detailed, formal restructuring plan
• Announcement of the main components to those affected Dr. Frederik Mielke
(before the balance sheet date) Director, PwC Assurance Real Estate, Germany
• Restructuring resolution under IFRS alone not sufficient
frederik.mielke@pwc.com
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 18Implications for the supervisory board of companies
Always well informed with the PwC Board Room App: https://pwc.to/boardroom-app
Role of the Supervisory Board Annual General Assembly
• Position and instruments basically unchanged • Relief: Online HV, shortened convocation period…
• Mostly more intensive monitoring with high demands on • Decision with the approval of the SB (even without a meeting
flexibility in person)
Flexibilisation of the Supervisory Board
Capacity to Act and Duties of the Executive Board
Organisation possible
• Observe and, if necessary, adapt the statutes/internal • Provisions for the Board's ability to act?
regulations • Ad-hoc requirements?
• Ensure a quorum, circular resolutions if necessary
• Video conferencing as a face-to-face session? Follow the
guidelines!
• Resolution in telephone conference usually requires
acceptance by all
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 19Your questions to the PwC
experts Susanne Eickermann-Riepe
Partner, PwC Real Estate Leader Germany
susanne.eickermann-riepe@pwc.com
Dr. Christian Wulff
Partner, PwC Retail & Consumer Leader, Germany
christian.wulff@pwc.com
Christiane Conrads LL.M.
Market overview Head of German Real Estate Desk, London
c.conrads@pwc.com
Thomas Veith .
Partner, PwC Real Estate Deals Leader Germany
Delays on construction site thomas.veith@pwc.com
Dirk Kadel
Partner, PwC Real Assets, Germany
dirk.kadel@pwc.com
Legal perspectives opening scenarios
Dr. Frederik Mielke
Director, PwC Assurance Real Estate, Germany
frederik.mielke@pwc.com
Accounting - valuation, business recovery &
Dr. Philipp Pröbsting, maître en droit
supervisory board involvement
Senior Manager, PwC Legal Real Estate, Germany
Philipp.Proebsting@pwc.com
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 20PwC information on COVID-19 and its impact on the real
estate industry can be found here:
Current information about Real Estate and also PwC Plus - All the information about real assets
COVID-19 with push message function
https://blogs.pwc.de/real-estate/ https://pwcplus.de/
Central email address for questions to PwC experts Weekly expert session via WebCast on current
on de_covid19_pwc_real_estate@pwc.com topics always Wednesday 10:00 to 11:00
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 21PwC COVID-19 Services
Operations Liquidity/Financing
• Management of the tenant and service • Monitoring the liquidity status
portfolio • Review of the loan portfolio
• Support in daily business • Support review grants and loan options
• Crisis Management • Dealing with tax deferrals
Scenario Analysis Strategic Impact
PwC E-Mail
• Development of scenarios for dealing • Expansion of IT systems & digitization COVID-19 Expert Contact:
with the COVID-19 crisis • Further development of the value chain,
• Changes in the business model to business model & assets de_covid19_pwc_real_estate@pwc.com
ensure sustainable cash flows • ESG implementation
• Experienced, interdisciplinary team (Legal, Tax, Operations, Financials)
PwC COVID-19
• Pragmatic and efficient project approach
Real Estate
Taskforce • Possibility of short-term support and 'Ready-to-Go' support with a proven
IT communication platform
PwC Real Estate | COVID-19 WebCast 15. April 2020
PwC 22COVID-19
Impact on Real Estate
Weekly PwC Expert Session via WebCast
22. April 2020, 10:00-11:00 am
Registration via Link or via E-Mail:
https:/www.pwc-events.com/Covid-19-Impact-Real-Estate
Registration via LINK or via E-Mail: andreas.hofstaetter@pwc.compwc.de © 2020 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft. Alle Rechte vorbehalten. "PwC" bezeichnet in diesem Dokument die PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft, die eine Mitgliedsgesellschaft der PricewaterhouseCoopers International Limited (PwCIL) ist. Jede der Mitgliedsgesellschaften der PwCIL ist eine rechtlich selbstständige Gesellschaft.
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