The coronacrisis is by no means over. But we know that it will come to an end eventually. What then will the property market – and the world – look like?
We know for a fact that we are headed for worldwide recession. Two consecutive quarters of downtrending global GDP are the inevitable outcome of governments around the world deciding to shut down a substantial part of business activities. Soaring unemployment figures do not necessarily mean that the crisis will be worse than the financial crisis – they are a natural corollary of the measures to fight the covid-19 outbreak by restricting travels, air traffic, access to shops, restaurants, etc.
Before the summer holidays, both Europe and the USA are expected to see society reopening on a large scale, albeit with some restrictions no doubt still in force to limit the risk of further large-scale spread.
Will politicians and central banks administer the appropriate economic measures?
There is a risk of the economic downturn caused by society’s shutdown translating into prolonged recession. Once society reopens, many businesses will have increased their debts, many will be averse to making investments, and uncertainty may well take its toll also on consumer spending. Consequently, we may be facing a long period of weak economic activity, and, by extension, a slowdown in the property market.
However, it is worth bearing in mind that there are other impact scenarios. The enormous scale of economic relief plans, by a wide margin topping those that kick-started economies in the aftermath of the financial crisis, may prompt a surge in the demand for goods and services. The question is whether the supply side will be able to keep up.
Although temporary, the shutdown of society during the coronacrisis will cause a lasting loss of production capacity.
Similarly, the very low oil prices, driven down by weak energy demand, will exacerbate the loss of production capacity.
In addition, the business community’s efforts to muster more robust business models after the coronacrisis, involving a lower degree of dependency on the efficiency of global supply chains, will make production more costly.
Against this backdrop, it cannot be ruled out that as from 2022, after many years of getting accustomed to exceptionally weak price increases, we will again see inflationary tendencies, potentially benefitting property prices.
Winners and losers in the property market
There are multiple reasons why the Danish property investment market is likely to experience a softer blow than the markets in most other countries:
- With a substantial proportion of companies in the pharmaceutical and food production industries, the Danish business community is relatively resistant to cyclical changes.
- In addition, the unique Danish mortgage financing model will prove its worth once again during this crisis: Property financing has become more expensive, but by no means on the scale seen in other countries.
- The combination of well-consolidated households, a large public sector with employees that are not hit hard by the coronacrisis, and, finally, large stimulus packages will soften the blow of a possible drop in consumer spending.
Some sectors will suffer a harder blow than others:
- When businesses focus more on the robustness of their business models, intent on reducing their dependency on efficient global supply chains, the demand for logistics and storage facilities will grow. We are convinced that this market will see yield compression and price hikes.
- The housing market will be relatively non-cyclical. Obviously, a recession will have a detrimental effect on the housing market, but well-consolidated households and large-volume stimulus packages will bolster the market.
- The office market will be slightly more susceptible. However, we believe that after a period of stagnant or slightly downtrending prices we shall see renewed increases in the prices commanded by attractive and centrally located office properties, not least fuelled by possible medium-term inflationary tendencies.
- The retail market will be the segment to bear the brunt. Online sales have surged during the coronacrisis, and it remains to be seen whether the traditional (physical) sale of specialty goods will ever bounce back to pre-crisis level – although, when society reopens, we will undoubtedly see massive sales campaigns to clear current stocks. Needless to say, this will boost physical retail sales for a while.
- In fact, we doubt that hotels and restaurants will suffer as hard a blow as the retail market in general. We will see a temporary decline in tourism, people will increasingly opt for virtual meetings and seminars, and also the MICE segment will come under pressure. However, in the longer term, the experience economy will pick up again.