- 16 FTSE Real Estate profit warnings issued in Q1 2020, compared to six in whole of 2019
- 100% of FTSE Real Estate warnings in Q1 2020 cited COVID-19
- Housing will ‘bounce back’ but sector profit warnings will continue to rise through Q2
FTSE Real Estate companies issued 16 profit warnings in the first three months of 2020 (Q1 2020) - more than double the number recorded in the sector in the whole of 2019 (6) - according to EY’s latest Profit Warnings Report.
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.
Both sides of the sector have seen a significant increase in profit warnings as a result of the COVID-19 outbreak with the number of warnings issued so far in 2020 already exceeding the high set in 2008 (15). All warnings issued in Q1 2020 cited the impact of COVID-19.
Fraser Greenshields, Partner and EY’s Corporate Finance leader in the UK & Ireland, comments: “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.
"Most Real Estate Investment Trust profit warnings have unsurprisingly 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."
Record breaking UK warnings
In Q1 2020, a total of 301 profit warnings were recorded by EY, almost equal to the entire number issued in the whole of 2019 (313) and 5% higher than the total for 2018 (287). Compared to the same period last year (Q1 2019), warnings rose from 89, representing a 238% year-on-year increase.
Although 77% of UK profit warnings blamed COVID-19 in the first quarter of 2020, it is worth noting that significant parts of UK plc were struggling before the pandemic. In January 2020, EY recorded UK warnings had increased by 43% year-on-year, when compared to the same month last year.
Lisa Ashe, UK Restructuring Partner at EY comments: “COVID-19 has created new problems, but it has also accelerated existing structural change and exacerbated existing weaknesses. When lockdown lifts, it will undoubtedly ease some pressures, but these underlying issues will remain. Businesses will need to plan carefully to consider what the new ‘normal’ looks like for both customers and suppliers and reshape their businesses accordingly.”
Housing will bounce back but expect more sector distress
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.
Fraser Greenshields added: “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. While some of the larger, diversified companies have the portfolio and balance sheet strength to withstand a prolonged fall in income, many of the smaller, leveraged companies do not."