Long term coronavirus effects 'much less severe than GFC'

While the coronavirus crisis will have a significant impact on real estate markets this year, with some sectors hit harder than others, the long-term result could be 'much less severe' than the global financial crisis (GFC), according to experts.

A new report from Colliers states that in the short-term, the eruption of coronavirus and the severe restrictions imposed to delay its further spread have enormous consequences for several industries, including the travel industry, hotels and conference centres, restaurants, the culture and entertainment sector as well as specialty retailers.

'These sectors have already experienced a slump in turnover and earnings, and it will not be long before the first businesses fold. This is going to inflict losses, also on the property industry,' the report noted.

However, the report added: 'In the long term, the consequences of Covid-19 will hopefully turn out to be much less severe than the consequences of for example the financial crisis.

'It is therefore not unlikely that we will return to more normal conditions already within a few months. However, the question is which short- and long-term effects we will see in the property market.'

Short term impact
'It is fair to expect a slowdown in economic activity in Q1 and possibly also Q2 2020, in technical terms spelling recession,' the report said.

'Monetary policy will remain exceptionally lenient, with central banks pumping liquidity into the market to such an extent as to eliminate last week’s budding signs of an imminent credit squeeze.

'At some point, we will presumably see the introduction of massive fiscal easing to mitigate the effects of the economic downturn.

'We will gradually see financial markets returning to normal, with a fair share of the losses incurred in recent months being recovered before year-end.'

Growth momentum
The report even suggests that growth momentum could be strong in the second half of the year, with backlog growth partially recovered. However it warned that in the commercial property market, activity will remain very weak, only returning to normal in the autumn at the earliest. 'We must emphasise that there is a real risk of more negative developments,' it underlined.

'However, it is quite feasible that the investment market will regain momentum relatively quickly, implying mainly that transactions are carried out a few months later than originally planned,' the report adds. 'Our basic scenario is therefore quite bright, although invariably entailing palpable consequences for a number of industries for a prolonged period of time.'

'Ongoing sales processes and transactions will suffer delays, and we may expect fairly weak transaction activity starting today and the next couple of months ahead, if not longer, far below 50% of the normal level,' said Peter Winther, CEO of Colliers Denmark.

'But we hope that we will soon see the effect of the many measures to contain coronavirus. In this event, transaction activity may bounce back very strongly in the second half of the year. However, the risk of a prolonged slowdown is most certainly real,' Winther added.

Long-term credit risk
However, ratings firm Moody's said it was less optimistic about the long-term credit scenario. The firm's investor service reported that for European real estate companies, while the immediate credit impact of the coronavirus outbreak will be limited, an extended coronavirus outbreak brings substantial downside risk.

The main factor driving the limited effect is that most rated real estate companies have no significant exposure to operating hotels and co-working premises, the segments likely most affected by coronavirus as the immediate drop in demand will result in a drop in income, the Moody's report noted. Owners of leased hotels and retail landlords will still experience pressure on their tenants and partially on income.

'As long as the coronavirus disruption is reasonably short-lived and economic growth slows as we expect, our key credit concern for real estate companies is liquidity,' said Oliver Schmitt, a Moody's vice president - senior credit officer. 'However, we expect rental income across most property types to stay largely intact.'

'The longer the outbreak affects economic activity and the more demand contracts, the more investment sentiment and overall reduced rent expectations will be hit, in turn leading to a potential weakening in the credit quality of rated European real estate companies,' Moody's concluded.

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