No industry has escaped unscathed from the global economic shock, caused by the COVID-19 pandemic. The sheer suddenness of the pandemic that fell out of nowhere has caught markets unaware and industries in past one year were left dabbling for recovery.
Real estate, both residential and commercial over the past year has had a challenging and bumping ride too. Every sector of the real estate industry has copped a hit in varying measures depending on their geographical location.
The lockdown shut the brick and mortar stores increasing retail store vacancy rates, brought down the home sales and bent the back of hotels and hospitality industry and whatnot. The financial and economic ramifications caused by the pandemic and the policy amendments that followed is surely going to have accounting implications too.
With the help of our real estate accounting experts at Back Office Accountants, we aim to provide you with a round-up of the immediate and long term impact of COVID-19 on the real estate industry from our perspective. And then point out key accounting implications for the real estate industry post the pandemic:
COVID-19 – Immediate Impact on Real Estate Industry:
The impact of COVID-19 was apparent on the U.S residential real estate market. The sudden pandemic and lockdown restrictions naturally resulted in economic uncertainty. Given residential real estate activity is largely driven by local conditions, metros suffered a significant decline and were hit the hardest. In effect, during April and May in 2020, the countrywide home sales plummeted to their all-time lowest since the financial and housing crisis of 2007.
Low mortgage rates and lower supply helped prices go steady and the potential buyer activity improved by the end of May. Though the economic uncertainty looming in the last quarter of 2020 didn’t help, there continues a sustained growth in home prices in 2021.
Long Term Impact of COVID-19 on Real Estate:
The long term impact of the pandemic on the real estate industry can be difficult to estimate as the total effect of catastrophe is yet to be known. But our accounting experts at Back Office Accountants feel that the potential long term impact can be the gauge by identifying the behaviour changes in people. Below are the two patterns that can emerge post-pandemic impacting real estate markets:
1. Every pandemic in the last few centuries was immediately followed by an amendment of housing plans and policies by the government to reduce the risk of such events in the future. So new preferences like more open spaces and another infrastructural requirement may impact the value of current assets which can become obsolete and less valuable in the future.
2. The closure of the shopping centres and malls further increased the adoption of e-commerce among shoppers. With many brands keeping up with online shopping demands with improved online user experience, the trend will continue to grow and accelerate post-pandemic.
This change in buying habits and wide-scale adoption of e-commerce could slightly impact commercial spaces but also can improve the demand for industrial spaces. Similarly, having been forced to adopt online learning models, universities may conceive and adopt new hybrid learning models which may have an impact on real estate too.
COVID-19 Impact on Real Estate Industry- Accounting Implications:
In few jurisdictions, rent concessions were made a requirement by the governments and in few others, these concessions were only encouraged. However these concessions may have an impact on the financial statements as these concessions must be accounted for lease modifications, which can be complex.
The International Accounting Standards Board made a few amends to include a practical expedient to account for these concessions for the lessee. However, the lessor must consider them as lease modifications for accounting purposes which can be complex. If you are facing accounting problems with the lease modifications, our real estate accounting experts at Back Office Accountants can help though.
In addition to this, payment delays from lessees must be carefully looking into by the real estate entity since leas receivable fall under the ECL model of IFRS 9. Also given the pandemic, real estate entities must also consider the case of enforcing the right to payment when the contracts contain force majeure or other clauses of the same nature.
Valuation of investment properties in the light of pandemic is another accounting implication real estate entities must take care of. Ascertaining valuation for investment properties has always been a tricky aspect of the real estate industry. And due to the sheer suddenness of the pandemic and the economic and market repercussions it led to, the valuation has become an even complex and important part of the process. Since the impact of the pandemic on real estate varies to geographical location, asset type, or tenancy, the valuation reports can be uncertain or even misleading. So the entities must help users with the necessary information and also ensure proper classifications.
Real Estate Accounting Services by Back Office Accountants:
COVID-19 has had far-fetching consequences and will continue to impact on real estate industry. Since the real estate industry is impacted by a wide variety of factors, add this to the policy amendment made by governments, it will have its accounting repercussions.
Given the transformational changes, the real estate industry may experience in the coming years due to the socioeconomic or behavior changes brought in by the pandemic, real estate entities must have strong accounting expertise under their wing.
If you are a real estate entity looking for accounting expertise to get your accounting work done and make full use of the current accounting opportunities, then Back Office Accountants can help. With years of expertise in offering accounting services to real estate businesses in the United States, our accountants at Back Office Accountants can help you with our dedicated real estate accounting services. You can contact us here: https://www.backofficeaccountants.com/
