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March 2020 – the month we shall never forget

UK

One of the final days of February saw the first case of coronavirus in Denmark – incidentally, the patient recovered within a week. Since then, the pandemic has halted a substantial portion of global economic activity, and we are headed for deep recession. However, national governments and central banks around the world are ready with a response. 

In the matter of only one month, the property market has changed completely, too. New lets still take place and investment properties continue to trade, but activity is weak. We are no doubt headed for an economic setback, and given the substantial uncertainty of the situation, many decisions are postponed.

In the financial markets, risk premiums have increased. It is therefore fundamentally fair to assume that the risk premiums on other investments are bound to be higher too. When investors are taken into more uncertain territory, they require higher yields.

In the initial stage of the current crisis, we saw businesses panic-buy liquidity. This translated into wide-scale panic sales of liquid assets, at downtrending prices, given that it is of course impossible to procure liquidity quickly by selling off illiquid assets.

Many businesses, in particular in the restaurant, hotel, retail and travel industries, have been hit exceptionally hard by the myriad of restrictions imposed to reduce the spread of coronavirus. In addition, many businesses in these sectors have struggled to meet their obligations, including rent payments. This also applies to businesses that have substantial equity capital – as we all know, you cannot pay your bills with equity capital; It requires liquid funds.

In both Germany and the UK, provisions have been introduced or are underway to prevent landlords from cancelling leases where the tenant has suffered an economic blow because of the coronacrisis, on account of non-payment of rent in Q2 2020. So far, Denmark has seen no steps in this direction, but in most instances, landlords and tenants find a solution together, in the spirit of constructive dialogue. 

Are we headed for prolonged recession?

It is today impossible to foretell the depth and (in particular) the duration of the current crisis. Nevertheless, history tells us that recessions brought on by exogenous shocks are much more short-lived than recessions brought on by structural or cyclical issues. According to a Goldman Sachs analysis, it will take the financial markets four years on average for the stock market to bounce back to pre-crisis level after a bear market triggered by business cycles, 10 years for a bear market triggered by structural issues, whereas an event-driven bear market, like today’s, will have recovered in the span of 12 months.

It should not be ignored that there is a risk of the coronacrisis resulting in prolonged recession, prompting higher commercial vacancy rates, downtrending rent levels and downtrending prices. However, our base scenario remains far less bleak. We believe that business cycles will improve as early as in H2 2020. We may well face spells of stagnating or declining property prices; However, our base scenario tells us that the market will not plunge into actual property crisis.

 
 

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Peter Winther

Executive Director | Partner | MRICS

Copenhagen

Peter is Executive Director and heads Colliers’ Danish Investment & Capital Markets teams. Peter provides strategic property consultancy services and facilitates the sale of commercial and investment properties, including hotels and shopping centres, as well as property portfolios and companies.

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