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Coronacrisis – its short- and long-term impact on the property market

uk

Society’s shutdown during the coronacrisis is sending the economy into recession, which will affect the market for commercial and investment property. In addition, however, the crisis will presumably also bring about long-term structural changes.

Every recession affects the property market. The deeper and more prolonged the recession, the more severe the consequences.

The recession resulting from the shutdown during the coronacrisis is deep, involving an economic setback that in terms of scale and acceleration is worse than the one experienced during the financial crisis. It is hardly surprising that the slump in economic activity is so rapid and steep as significant parts of social life – shops, restaurant, hotels and airports, to name but a few – are shut down completely. As a matter of fact, it makes no sense to make a comparison with the recession in the aftermath of the financial crisis. No wonder that the unemployment rate is rising in Las Vegas when all hotels and entertainments are shut down. Naturally, this deals a harder and more dramatic blow to economic activity than the financial crisis scenario when it is business as usual, except for the fact that people tend to spend less money. 

“The recession that we are currently witnessing will develop quite unlike any ordinary recession. When society reopens, activity will of course pick up considerably – but it remains to be seen how long it will take for the economy to bounce back to pre-crisis level,” says Peter Winther, CEO Colliers.

Investment property prices in for an average decline of 5% tops in 2020

We will recover from the current cyclical downturn in the property market. Maybe it will take six months, or maybe two years. We are going to see a sharp increase in retail vacancy rates, the hotel sector will be hit too, office property values could decline by 5%, residential and logistics properties presumably by somewhat less. At the same time, an exceptionally lenient monetary policy will fuel investor demand. The fact that the stock market rallied by 20% in April is hardly due to market players being oblivious to the severe effect that society’s shutdown will have on the business community’s earnings, let alone the resulting effect on the economy and spending – but rather that monetary policy is bolstering the financial markets substantially. This will also have a favourable effect on investor demand.

Overall, Colliers expects the prices of well-located residential rental properties as well as office properties to drop by not more than 5% in 2020.

“In all probability, the decline in prices will only be temporary so that already in 12 months’ time we will have returned almost to pre-crisis prices. Logistics facilities are more likely to see price increases, and only properties used for retail purposes (discounting grocery shops and possibly DIY centres) and hotel operations will be hit harder,” says Peter Winther.

Every crisis brings structural changes

When at some point the coronacrisis has been put completely behind us, with the economy back on pre-crisis track, it will most likely, however, have fostered some more lasting structural changes that may have both favourable and detrimental effects on the property market:

  • Online sales are accelerating even further. As a result, retail area requirements will be reduced, while storage and logistics areas will expand.
  • Working from home will become more commonplace. Many have tried to work from home and have grown used to it. All other things being equal, this will drive up the demand for housing, possibly causing a shift in demand, with the urbanisation trend easing off as a result. People may again flock to out-of-town locations to gain more space, which may impact demand in particular for city flats.
  • Working from home may reduce office area requirements as businesses will have fewer assigned workplaces.
  • Social distancing will probably gain ground. Conversely, this may drive up office area requirements because office staff is no longer to be seated so closely together. The same could possibly be the long-term outcome for restaurants, etc. – but not necessarily at the same rent level, as social distancing is impairing space-efficiency. The market for MICE (Meetings, Incentives, Conferences and Exhibitions) will be adversely affected. We have to a large extent grown accustomed to the use of electronic media.

In many respects, the legacy of the coronacrisis may well be a lower level of efficiency and, all other things being equal, therefore climbing prices. For the past 30 years, globalisation, liberalisation and production increases have e.g. led to improved efficiency and lower prices. The airline industry is a shining example of this.

However, the call for social distancing, better hygiene and more robust business models will result in less efficient resource use, lower productivity and higher prices.

By no means can it be ruled out that after a period of exceptionally low inflation on the heels of the coronacrisis, when stocks must be reduced, we will see a spell of somewhat higher inflation – all the while that central banks will be forced to maintain a sustained low interest rate level, both to stimulate economic growth and to ensure that increased sovereign debt is not becoming more expensive.

… on a final note, a bit about section 5(2) …

Having waited for months on end, we have now seen the Danish housing minister’s proposal for a stricter regulation of the possibilities of charging higher rent after comprehensive modernisation of old-stock residential properties. The Bill is largely as expected: It will deplete the incentive to carry out improvements of functionally obsolete dwellings, and it will compound an already highly complex set of rules by making it even more complex.

However, it is not all bad: Apparently, the 5-year qualifying period following a change of ownership will not apply if such change of ownership took place before the Bill was submitted. Perhaps the minister was worried after all lest the waiting period should affect property acquisitions already carried out, thus approximating to de facto expropriation.

However, it does not change the fact that future ownership changes will be subject to a qualifying period, translating into downtrending investment property prices in this segment, across the board and at random, even in the event of a change of control due to mergers, hereditary succession and the take-over of defaulted mortgages.

 

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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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