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How will COVID-19 affect the property market?

How will COVID-19 affect the property market?
April 21, 2020 Kenji Smith

How will the COVID-19 affect the property market? Brickowner has summarised some leading industry reports to provide the most recent analysis. We will write updates as things change due to government policies, and the impact of COVID-19 become clearer over the coming months.

We have looked at three market reports:

1. Savills: The Economic impact of COVID-19 and implications for the UK property market (31/02/2020)

2. McKinsey & Company: Commercial real estate must do more than merely adapt to coronavirus (10/04/2020)

3. Rising Realty Partners: The real market, podcast with Richard Barkham (CBRE) (09/04/2020)

Savills’ Lecture: The Economic impact of COVID-19 and implications for the UK property market

Residential Market

1. In Q2 2020, GDP will contract, before a strong rebound in Q4 2020. Importantly, in the worst case and base case scenarios, they conclude there will be no net loss in GDP over the next 5 years.

2. They predict only a temporary increase in the unemployment rate, and therefore no significant overhang in negative sentiment. Thereby, as history has shown, house prices should return fairly quickly once the unemployment rate starts to decrease.

3. Interest rates will stay relatively low for longer periods. Assuming individuals do not suffer from high unemployment rates as forecasted, stable incomes and lowest interest rates should keep demand afloat.

4. Looking at inflation-adjusted house price movements against the growth of the economy, they observe that before the disruption, house price growth was much less volatile relative to past house price movements. Therefore, house prices may be less exposed than they would have been in previous downturns.

Commercial Market

5. Offices: Low vacancy remains and intensifies due to a lack of development.

6. Retail: Continuation of tough times. Opportunistic investors will return to this sector. Investor demand will return for warehousing and food stores.

7. Hotel and Leisure: Strong bounce back could come sooner than retail. Especially for hotels that cater to a domestic audience.

8. Logistics: 3.1 million sqft of new requirements have been requested since the 16th of March, mainly coming from grocery, online and pharma companies.

McKinsey & Company Report – Commercial real estate must do more than merely adapt to coronavirus.

1. Real Estate leaders will need to act now to deal with permanent changes imminent within the real estate sector after the crisis.

2. Centralise cash management – More creative cash-creating activities, rather than cutting costs, will be required to provide capital expenditure. E.g. Rent-to-own programs and financing partnerships.

3. Acceleration of digitalisation – More distinctive tenant and customer digital experience, such as augmented and virtual reality, will be required to match their needs.

4. A new rise of communication directly between tenants and asset managers, property managers and newly joined CEOs and management teams should result in quicker and more efficient decisions being made.

5. Behavioural Changes
a. Public Health officials may limit the risk of future pandemics by increasing the square footage allowed for each person in enclosed spaces.
b. Changes to business travel – video conferences may be sufficient or even preferable. Therefore, a shift from cross border business travel to local destinations may be imminent.
c. Consumers forced to shop online may permanently adjust their buying habits. Before the outbreak, the trend was already shifting away from physical stores, and this pandemic may accelerate that shift.
d. This shift to e-commerce may boost demand for industrial space and niche asset classes such as self-storage.
e. Universities have been forced to educate their students remotely. However, this may be sufficient for students and stakeholders to alter their way of teaching.

Rising Realty Partners: The real market, podcast with Richard Barkham.

This podcast discusses the potential impact COVID 19 will have on the United States and globally. Richard Barkham is one of the world’s leading real-estate economists, currently working for CBRE.

1. Barkham believes COVID 19 will have a short shock to the economy, of 3-6 months, with a gradual recovery thereafter.

2. The global economy has withstood shocks in the past:
a. 1974 – When Oil prices tripled, brakes were put on Western Economies.
b. Stock market crashes, where an individual’s wealth disappeared and spending halted.
c. Barkham believes historical “self-righting mechanisms” will aid economic recovery in the long run.

3. Governments’ intervention has helped preserve the supply-side of the economy.

4. Central banks are likely to buy these new issuances of debt. However, this may lead to a monetisation period during which inflation will occur.

5. Hotels: grace periods offered by lenders to borrowers will help keep the industry afloat.

6. Offices:
a. Berkham believes the demand for office space will continue.
b. Home wifi-networks may be unsafe. The lack of face-to-face interaction may discourage productivity. These limitations, and people’s desire to return to work may boost the amount of office space required.
c. Office life may change – cleanliness of the office and anti-pandemic protocols may be put in place.
d. Berkham believes offices will recover quicker then the retail sector.

7. Unemployment:
a. Unemployment is a key indicator of the momentum of the economy.
b. COVID 19 is unlike the last two recessions, where it took years for unemployment rates to fall.
c. Barkham estimates that United States’ unemployment rate should quickly peak and thereafter, a gradual decline till the end of 2021, assuming that COVID-19 is brought under control.

Sources:

https://www.savills.co.uk/research_articles/229130/298508-0/what-covid-19-means-for-the-uk-property-market

https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/commercial-real-estate-must-do-more-than-merely-adapt-to-coronavirus

https://risingrp.com/podcast/ep-38-richard-barkham