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Which property segment is most vulnerable to COVID-19 risks?

by Gerv Tacadena on 26 Mar 2020

The coronavirus outbreak is taking its toll not just on public health but also on the different sectors that make up the economy — and the property market is no exception.

Vishesh Raisinghani, researcher and representative at MarketCurrents, said commercial property is particularly vulnerable to economic shocks brought about by the spread of COVID-19.

"Unlike residential real estate, commercial properties like factories, retail stores and office units are much more exposed to economic cycles. Commercial property owners and real estate investment trusts already pay higher interest rates for borrowed capital," he said in a commentary for The Motley Fool Canada.

Raisinghani said tenants are also exposed, with an economic collapse leaving them with no choice but to fall into default.

"All shops and offices are shut due to the national health crisis. It should therefore come as no surprise that commercial property is vulnerable," he said.

If the outbreak creates deeper dents in the economy, Raisinghani said things could get worse for commercial properties.

"If the shutdown lasts longer than expected, things could get worse. REITs may have to cut dividends and mark down the value of the real estate assets," he said. "Investors should beware of the risks here. Avoid catching falling knives."

Provincial governments have already laid out plans to assist businesses affected by the COVID-19. British Columbia Finance Minister Carole James recently announced a $5bn package to help companies survive the economic shocks from the outbreak.

One assistance being offered is reduced property tax for commercial real estate.

“This relief tax savings for the average urban commercial property owner is going to be about $4,000. We do expect that these savings will flow through to tenants who have triple-net leases, providing support to them as well,” James said.

In Toronto, calls for the postponement of commercial property taxes were also made.

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