Credit: ShutterstockChile’s Constitucional Referendum Could Prolong Economic Downturn
April 17, 2020Real Estate
COVID-19 is leaving its mark on the Chilean economy and health system, nevertheless GRI Club Members continue to perceive more risk from the constitutional referendum that has shaken the country since October 2019. Chile’s constitutional referendum that was originally scheduled for April 26 will now take place on October 25 due to the COVID-19 outbreak, leaving the country with great uncertainty.
Main Takeaways
Members agreed that now is the time to prepare projects, secure licences and permits, so that when the quarantine is lifted, the industry can start operations immediately and no time is wasted to recover the industry. They also agreed that right now is not the time to launch new projects, as financing has become more difficult to acquire. Although it may not be the time to start a new project, within a crisis are the seeds of opportunity. Members discussed that there may be good opportunities in the market for investors to discover but it must be done with great caution.
As the quarantine stops all movement, the time to market of projects may be impacted, but hopefully no large harm to the project pipeline will be done. Members feel this will be a temporal situation and that business will go back to normal. At the moment, 30 percent of the residential square meters in construction are in the areas blocked off by the quarantine, generating a short term risk in projects’ finances. In comparison to the residential market, the office market may be impacted in the medium and long term due to the uncertainty generated by October 18, 2019. Overall, members are worried about the sanitary crisis, but agree that postponing the referendum is having a greater impact on both the country and the industry. Countries that are not experiencing the same social issues such as Chile will start their recovery into 2021.
The residential market will be impacted by the interest rates, inventory and expectations. Chile had a low inventory and quite low interest rates when the sanitary crisis hit, but the problem here are the expectations. Various segments will take much longer to recover. Multifamily and subsidies are anti-cyclical and tend to do well during adversity. Members expect these sectors to recover faster than those of 8,000-10,000 UF in Santiago. Members discussed that sales periods could accelerate and in return strengthen the rental housing market as there were some units to be sold and they wanted to generate income. Members suggested that it is a good time to analyze their lands and project pipelines to see which can be launched the fastest. The Peruvian and Colombian markets were having good performance and the impact on those sectors could be short term and transitory.
When it comes to retail, the sector was already going through a very difficult time after October 18, and now with the closing of all malls and centers, members are trying to support their tenants as much as possible. Members do not know how long the effects of the crisis will impact the retail sector, and how long it will take to reactivate it once the quarantine is lifted. But they are seeing opportunities for retail to boost their e-commerce strategies to come out of the crisis.
Investors are also cautious and members discussed that cap rates are very different in Chile nowadays. Investors have fled as there were not many opportunities for them at the moment. Although the residential sector is performing well, and people are paying as it is a necessity, members believe that investors see more opportunities for investment in multifamily in other countries. The social crisis made investors look to new countries for opportunities, and now that COVID-19 has hit globally, now they have to be more selective. Student housing and Senior living will present some challenges with the sanitary crisis and it will need great expertise to manage those communities safely and successfully.
Main Takeaways
- GRI Club Members predict a longer-lasting economic recession for Chile due to uncertainty generated by the constitucional referendum.
- Multifamily is predicted to recover more rapidly than other housing sectors.
- The Chilean market could go back to a basic need market where retail and hospitality would the most affected by the crisis, and will take longer to reactivate.
- It is important to keep the project pipelines so that when the storm calms, all sectors can reactivate their operations immediately to lessen the blow.
Members agreed that now is the time to prepare projects, secure licences and permits, so that when the quarantine is lifted, the industry can start operations immediately and no time is wasted to recover the industry. They also agreed that right now is not the time to launch new projects, as financing has become more difficult to acquire. Although it may not be the time to start a new project, within a crisis are the seeds of opportunity. Members discussed that there may be good opportunities in the market for investors to discover but it must be done with great caution.
As the quarantine stops all movement, the time to market of projects may be impacted, but hopefully no large harm to the project pipeline will be done. Members feel this will be a temporal situation and that business will go back to normal. At the moment, 30 percent of the residential square meters in construction are in the areas blocked off by the quarantine, generating a short term risk in projects’ finances. In comparison to the residential market, the office market may be impacted in the medium and long term due to the uncertainty generated by October 18, 2019. Overall, members are worried about the sanitary crisis, but agree that postponing the referendum is having a greater impact on both the country and the industry. Countries that are not experiencing the same social issues such as Chile will start their recovery into 2021.
The residential market will be impacted by the interest rates, inventory and expectations. Chile had a low inventory and quite low interest rates when the sanitary crisis hit, but the problem here are the expectations. Various segments will take much longer to recover. Multifamily and subsidies are anti-cyclical and tend to do well during adversity. Members expect these sectors to recover faster than those of 8,000-10,000 UF in Santiago. Members discussed that sales periods could accelerate and in return strengthen the rental housing market as there were some units to be sold and they wanted to generate income. Members suggested that it is a good time to analyze their lands and project pipelines to see which can be launched the fastest. The Peruvian and Colombian markets were having good performance and the impact on those sectors could be short term and transitory.
When it comes to retail, the sector was already going through a very difficult time after October 18, and now with the closing of all malls and centers, members are trying to support their tenants as much as possible. Members do not know how long the effects of the crisis will impact the retail sector, and how long it will take to reactivate it once the quarantine is lifted. But they are seeing opportunities for retail to boost their e-commerce strategies to come out of the crisis.
Investors are also cautious and members discussed that cap rates are very different in Chile nowadays. Investors have fled as there were not many opportunities for them at the moment. Although the residential sector is performing well, and people are paying as it is a necessity, members believe that investors see more opportunities for investment in multifamily in other countries. The social crisis made investors look to new countries for opportunities, and now that COVID-19 has hit globally, now they have to be more selective. Student housing and Senior living will present some challenges with the sanitary crisis and it will need great expertise to manage those communities safely and successfully.