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Valuation News: Market Conditions | January 2021

The year 2020, to paraphrase a US president, will live in infamy. It will long be remembered as the year that the Covid-19 virus created worldwide havoc and changed the entire world. It upended lives, economies, ways of life and everyday routines such as socializing and working. While this pandemic is far from over, the US real estate and stock markets have exceeded pre- Covid highs – possibly due to the news that a vaccine could soon be available. 

Unfortunately, Trinidad & Tobago has not had a similar experience and the economy and the real estate market are still reeling from the effects of the pandemic. The Minister of Finance, Colm Imbert, in his 2021 Budget presentation, projected GDP to contract in real terms by 6.8% in 2020 although the IMF expects the decline to be 5.6% in 2020 while forecasting growth of 2.6% in 2021. 

The contraction in the economy, caused to a large extent by the measures taken to mitigate the spread of the virus, has resulted in a decrease in both the revenue of businesses as well as the salaries of many employees. Not surprisingly in the current dire economic circumstances, there have also been increases in unemployment and crime while inflation has remained subdued. As stated many times by us in the past, the real estate market in Trinidad & Tobago mirrors the national economy and as would be expected, all these factors are having an adverse effect on it. In addition, the pandemic has caused many companies to consider having employees work remotely which would therefore reduce the amount of office space needed. 

These two facts (reduced revenue and remote working) could result in an increase in the amount of vacant office space available which could possibly lead to a decline in rental rates. Yet, the new requirement of social distancing could lessen the impact of the reduction in office space required by companies going forward. 

As would be appreciated from all of the above, the short-term future of the real estate market remains cloudy. Due to the many different scenarios that could occur in the immediate future, three possible scenarios have been prepared and posted in a video entitled “Impact of COVID-19 on Commercial Real Estate” on the G. A. Farrell and Associates Limited Facebook page in an effort to assist stakeholders in visualizing them. 

Nevertheless, it must be borne in mind that investing in real estate is traditionally a long-term investment with somewhat low liquidity. Any decline in prices, therefore, takes some time before it is observed since prices usually lag behind macroeconomic changes. This is in contrast to other investments like stocks and bonds that can be traded in real-time, and so often suffer adversely due to irrational and emotional market sentiments. 

A problem, from a valuation standpoint, is the reliance on valuation reports on historic market evidence/sales to derive current opinions of the market values of properties. The issue is the relative scarcity/paucity of current sales transactions in sufficient numbers. Consequently, the reliability of the historic data is debatable at this time, and therefore, it is recommended that a higher than the customary degree of prudence be attached to current valuations. 

The contents of this newsletter do not constitute advice and should not be relied upon as such. It is published for educational purposes only without responsibility on the part of G. A. Farrell and Associates Limited, its directors, partners or employees.

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