The number of profit warnings issued by FTSE-indexed real estate firms in the first quarter of 2020 is more than double the number recorded in the whole of last year, due to the COVID-19 pandemic.
According to EY’s latest Profit Warnings Report, FTSE Real Estate companies issued 16 profit warnings in the first three months of 2020 compared with six profit warnings in the whole of last year.
The FTSE Real Estate sector breaks down into FTSE Real Estate Investment and Services and FTSE Real Estate Investment Trusts (REITs), with the former issuing nine warnings and the latter issuing seven, the report said.
Fraser Greenshields, partner and EY’s corporate finance leader in the UK and Ireland, said: “2020 was always going to be a testing year for a significant element of the real estate sector, especially those exposed to the increasing strain on retail and leisure tenants.
“The impact of COVID-19 has significantly amplified the pressure and added new stresses.”
Greenshields said most REIT profit warnings have come from companies exposed to the retail, hospitality and leisure sectors, “where we’ve also recorded the largest drop in rent collections”.
There is also a cluster of warnings in student accommodation, where major providers have waived final term fees, putting pressure on others to follow suit, he said.
According to EY’s report, FTSE Real Estate Investment and Services companies have been hit by a sharp decline in activity in the housing market. While the impact of COVID-19 on consumer confidence and incomes might delay the recovery, structurally the market remains undersupplied.
Greenshields said the housing market has been hard hit on the supply side by social distancing regulations on construction sites and weakened demand.
“However, strong underlying demand means that this market should bounce back relatively quickly.
“The same cannot be said for real estate sectors that were already under structural pressure, such as retail, and markets vulnerable to falling numbers of travellers and international students, who make up a high proportion of tenants in purpose-built student accommodation.
“We expect more sector distress and profit warnings will continue to rise in this second quarter as more companies are hit by tenant loses and delayed or missed rents.”
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