Economic disruptions to help curtail the spread of the coronavirus started off small but have now reached "critical mass" in the U.S. and across the world, according to Allianz Chief Economic Advisor Mohamed El-Erian.
As one US based expert put it, we’ve opted to put the global economy into a medically induced coma, a necessary freeze to prevent the spread of the virus.
Governments, businesses and communities are facing up to the reality of Covid-19 and while the short-term impacts on economic growth, business activity and individual behaviour are undeniable, experts maintain that the consensus is for a rebound in the global economy in H2 2020, the exact trajectory is unknowable.
For the global real estate industry, the effects of the pandemic are undeniable.
According to a recent JLL report on the global implications of the Covid-19, the short-term impact on global economic growth is undeniable, with those countries that are the most advanced in the outbreak already feeling the effects.
“At the time of writing, the consensus forecast is for a sharp shock to the global economy in the first half of 2020, followed by a bounce-back – reminiscent of the recovery after the SARS outbreak in 2003. Although the immediate hit to demand has been very evident in the retail and hospitality sectors, certain industries are more susceptible to the disruption of supply chains. Disruption has already started in sectors such as automotive, aviation, chemicals and consumer goods, and the full effects have yet to filter through. Conversely, pharmaceuticals and healthcare are most likely to experience a surge in demand,” notes the JLL report.
Looking at investment activity, the JLL report reveals that investment activity is likely to slow in H1 2020 as investors react to uncertainty, with retail and hospitality sectors being the most affected.
“Real estate investment has fluctuated during previous crises, but the overarching trend over time has been for increased allocations to the sector and we see no reason for this to change”, however the consultant is positive that real estate will continue to offer attractive relative returns in comparison to other asset classes.
For real estate consultant CBRE, travel restrictions are already resulting in the cancellation of face-to-face meetings, site visits and trade shows in EMEA.
“This could impact the real estate investment market, with a reduction of inflows from Asia Pacific-based investors possible. As the first quarter is typically a slow period for the investment market, the impact on full year volumes may be somewhat limited. To put this into context, over the last 14 years, the first quarter accounted for 20% of total annual investment per year, compared to the fourth quarter’s 30% (with the risk of stifled economic growth, central banks are likely to keep rates low in this environment. This may help liquidity create new investment opportunities). Moreover, given that the investment market moves slowly in terms of transactions, any effect on investment may not be observable immediately,” says the consultant in its recent report on the potential impacts of Covid-19.
“Retailers with robust infrastructure to fulfil online orders could be longer-term beneficiaries, placing a greater emphasis on the shift towards a flexible omnichannel retail model. Ensuring continuity of operations by rethinking supply chains will be key to mitigating the risk of future shocks,” notes the consultant.
For the EMEA office sector, the impact on the office market has been limited thus far. “However, supply chain and logistics issues arising from a disruption in manufacturing and transport could hamper the construction pipeline and affect renovation projects. Recent stock market corrections may trigger companies to adopt a more cautious approach to expansion in the short-term,” according to the CBRE report.
Disruption to global supply chains is the main effect on the industrial and logistics sector with reduced activity at major ports and airports results in failing utilisation rates. However, JLL says that the outbreak might accelerate the use of automation and robots in operations and reduce the sector’s reliance on labour. “The move to online shopping, especially for groceries, could become more permanent and, in turn boost demand for logistics space.”
In the short-term, CBRE expects a decline in Chinese arrivals to Europe resulting from measures to contain COVID-19. However, the overall impact of this will be limited.
“Regarding intra-regional European travel, in the short-term we expect corporate and MICE (meetings, incentives, conference and events) demand to be most vulnerable to the COVID-19 outbreak as organisations adopt a cautious stance on non-essential business-related travel,” notes CBRE.
CBRE also expects leisure travel demand to generally remain stable in the immediate term, ensuring domestic travel markets stay relatively robust. However, this will depend on individuals’ perception of risk, government measures and the ability of consumers to recover any possible losses from travel insurance providers, concludes the consultant.
Here at home, Richard Paul, head of professional services and strategic consultancy for Savills Middle East says: “The exact impact of COVID-19 is unknown, but any disruption to the real estate markets is likely to be a near term delay or a knee-jerk reaction rather than a fundamental downturn over the long term. There will be inevitable impacts on economic growth, tourism, high-street retail spends, and so forth but there are longer-term outtakes such as accelerating trends within flexible working, online retail and improving supply chain.”
Murray Strang, Head of Dubai Office at Savills Middle East said: “The real estate sector in the country has remained largely resilient during the first two months of 2020. The introduction of a stimulus package by the Central Bank will be a shot-in-the-arm to the property market in the medium-to-long term. We have already witnessed a gradual increase in demand, especially across the residential sector in 2019 and a further relaxation in LTV ratios will encourage more investment appetite into the sector. Banks will likely step-up their exposure to real estate and the construction sector, a spike in re-mortgage activity may also be witnessed in the coming months due to attractive borrowing rates and other promotional discounts.”
In Abu Dhabi, the Abu Dhabi Executive Council directed by Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces has also announced 16 new initiatives to support businesses and the community. According to Savills, the fast-tracked #Ghadan21 initiatives to be implemented immediately will enable Abu Dhabi to adapt swiftly to both current and future challenges.
Edward Carnegy, Director- Head of Abu Dhabi office at Savills Middle East said: “The upfront financial requirement to buy property has reduced as individuals now have an additional 5% as part of the relaxed LTV norms. The Abu Dhabi government has also waived off (for the entire year) real estate registration fee of 2%. As a result, transaction activity by residents may increase as individuals who are currently renting will find it more affordable.