Why are HNWIs from developing markets investing in European assets?

The knock-on effects of the coronavirus – widespread panic, quarantine, falling oil prices, and weakening oil-dependent currencies like the Russian ruble – are hitting the real estate market hard, according to the founder and managing partner of Tranio, an international real estate broker and investment platform.

George Kachmazov, who launched the Moscow-based company in 2010, said the hotel and retail segments were the first to fall, with cafes, restaurants and shopping centres forced to close their doors soon after. “As we speak, companies are cutting costs and downsizing, while hotel operators are asking landlords to lower rental rates,” he says.

“The first bankruptcies in the hotel segment have already started and it’s likely that buyers will be able to negotiate up to 20% off the asking price of some properties in already overheated markets.”

Long-term residential rentals — apartments and entire apartment buildings — will be affected the least, Kachmazov states. “Most tenants will only ask for discounts if the macroeconomic decline is significant and drawn out, in other words, if GDPs fall sharply and unemployment rates rocket. This explains why in a normal economic situation, residential property yields less than commercial: the lower the risk, the lower the yield.”

He believes we will witness a general decline in global economic growth rates, but countries across the globe are stepping in with unprecedented measures to protect their economies.

“Many countries, acting through regulators, have announced supportive measures for the market,” he said. “For example, the FED has slashed its interest rate to 0% and it’s likely that the ECB will resume quantitative easing. We expect that cheap leverage will allow the market to weather the turbulence without catastrophic losses.”

How are HNWIs reacting?

Despite the crisis and quarantine, HNWIs from developing markets have wasted no time in actively showing their interest in investing in foreign real estate, Kachmazov claims.

“Over the last few days, five separate major capital owners have contacted Tranio,” he says. “Most investors are adopting a rational approach: they want to find attractive investment opportunities over the next four to six months. Nobody expects to be able to buy anything cheaply right now because: at the moment it’s technically impossible and bankruptcies can be expected in due course.”

The interest of HNWIs during the crisis is not a coincidence, he adds. “A number of our clients have told us that they have been waiting for a recession to hit the overheated market so they can buy discounted properties but investors understand that regardless of the crisis, pumping capital into good real estate remains very difficult.”

HNWIs from developing markets, including Russia, have mostly been holding their capital in stable currencies to avoid the consequences of tumbling local currencies, Kachmazov says.

“However, wary of the situation worsening in their homeland, they’ve been quick to direct their attention to international investments – on average, they’re investing a total of €50-100 million in multiple projects, parting with €10-20 million for each. The average yield expectations are realistic at 10-15% per annum in dollars or euros. For most major investors, this is not the first step towards real estate investment in Europe and the US.”

Kachmazov says that, according to Tranio’s experience, Russian investors are not the only ones who want to buy assets at affordable prices during this crisis. Those with significant amounts of capital in other markets are also taking a keen interest.

“We expect up to 20% to be discounted from some properties and we don’t expect any sales at rock-bottom prices because: too much cheap leverage has been accumulated in the world over the past five to ten years, and governments will endeavour to protect businesses and people.

How will investors with budgets up to €1 million react?

“We expect the number of enquiries from Russian-speaking buyers with budgets of around €1 million to decline by about 50%. However, we don’t expect the rate of enquiries from international buyers to fall: Europeans, Americans, and Asian investors will probably remain just as interested in foreign property as they were before the crisis. This is because these clients will not be affected by the fall in oil prices and currency fluctuations as severely as Russians.”

What’s next?

In three to six months, Tranio expects to see some attractive offers appearing, with several possible opportunities materialising:

1) Crisis management of facilities, managing tenant relations;

2) A demand for distressed assets, primarily in the hotel segment as it’s the most affected, but also in other niches, depending on how hard the markets are hit;

3) Land development because the risk premiums for such assets will be higher.