New trends in hospitality, residential and retail real estate have reshaped the Tbilisi landscape in recent years, but the COVID-19 crisis is presenting a number of challenges. Cushman and Wakefield Georgia outline just how in a recent report.
Though the National Statistics Office of Georgia reported GDP real growth rate at 5.1% and inflation at 6.4% in March 2020, the unfortunate reality is that fears and the actual reduction in trade, commerce and tourism, as well as the devaluation of the national currency, will likely change for the worse in the medium term, as has happened world over since the COVID-19 breakout.
Commercial Real Estate
The commercial real estate market is already experiencing a shortage of demand – just before Prime Minister Giorgi Gakharia announced the closure of non-essential retail establishments on March 19, Retail Group Georgia, ICR and Gtex announced the closure of their stores, including some of the most popular brands on the market such as Zara, Mango, Massimo Dutti, Adidas, L.C. Waikiki, Nike, Bata and others.
One of the defining characteristics of the Tbilisi retail market – and especially in its apparel, footwear and accessories segment – is the lack of the presence of e-commerce. This has a number of underlying reasons; rigid return policies often mean that the customer may run a greater risk purchasing online than if they were to purchase an item in-store. Additionally, the factor of perceived convenience is low: Tbilisi is small enough, and travel times to malls and stores is small enough to cancel out the convenience advantage of buying online.
This market gap of e-commerce may well be filled in the medium term, given that online shopping has a distinct upper hand over the traditional brick-and-mortar option in the context of the COVID-19 pandemic. However, closure of more stores is to be expected which will in turn put a downward pressure on rent rates both on high streets and in shopping centers as vacancy increases.
While the effects have been almost immediate for retailers, office real estate will likely have a longer reaction period. As tenants transition to remote working, office buildings will have to deal with reduced turnover, adopt rent-relief programs and prepare for reduced market demand, given that the number of new entrant businesses is expected to drop within the short term. We also expect the scheduled openings of new business centers to be delayed until 2021.
Residential Real Estate
In a shrinking economy, the housing market typically suffers as demand is redirected towards short-term needs and necessities rather than long-term investments. Expectations – which are low at the moment – will reflect these traditional dynamics as well. Yet the primary and underlying cause for concern is the heavy reliance of the Georgian residential market on remittances.
With the economic crisis gripping nations where remittances typically originate from – Italy being the prime example – a major reduction in the inflow of these funds is to be expected. With the loss of tourism revenue, a reduction in the circulation of foreign currencies, the drop in oil prices and the devaluation of neighboring countries’ currencies, the lari is also facing destabilization. Measures have been taken by the National Bank of Georgia to hinder the process of devaluation; nonetheless, the negative pressure on residential demand may soon become apparent.
In coming months we expect the subdued demand to become apparent in transactional and mortgage data, which will gradually put a downward pressure on residential prices. The ability of this sector to rebound quickly, however, was seen in 2019, when the new regulatory framework caused a slowdown in sales in Q1, until improving expectations provided a much-needed boost in April. It remains to be seen how the timeline of the race against COVID-19 will affect the lifeline of the residential market.
Strong public and private response
The Georgian government and the healthcare sector has dealt admirably with the COVID-19 crisis, mobilizing all the means necessary to contain the virus.
A number of commercial banks, including TBC Bank, Bank of Georgia and Liberty Bank, have instituted a three-month grace period on personal and commercial loans with a special focus on small and medium sized businesses that rely on tourism and social gatherings to generate revenue.
With the assumption that COVID-19 will be contained globally by June, Cushman and Wakefield projects the following end-year benchmarks for the tourism, hospitality and real estate markets:
● 30-35% y/y reduction in the number of residential real estate transactions
● 46% y/y reduction in international visitor trips
● Average city-wide occupancy rate of 30-35% in Tbilisi
However, there are still many uncertainties concerning the coronavirus and its effects, with the greatest concern being the longevity of COVID-19’s survival and the overall resilience of the global economy.
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