Now, most market observers agree that the damage caused by the Covid-19 epidemic may have a near-term impact on the UK economy and real estate market.
But there are still many problems:
- What is the impact on UK GDP?
- How much will real estate transactions fall, and when will they resume?
- What impact will it have on house prices?
- How is this downturn different from the 2008/09 financial crisis?
- How will the development sector be affected?
- Does the loan still make sense in this environment?
These are some of the important inbound questions we raised from investors and developers. There are many uncertainties in the answer, but the current thinking can be summarized as follows.
The Economy of the UK
The current blockade policies implemented in the UK and other regions have had a huge and direct impact on real-time economic activities.
Although the decline is comparable to that in 2009, there are fundamental differences. Importantly, the 2008/09 crisis was a recession triggered by reckless subprime mortgages, high levels of consumer debt, and an over-leveraged banking system. As we all know, the so-called “balance sheet recession” will take years to get out.
In contrast, this recession was largely spontaneously imposed on the health crisis. The health crisis has hit the overall healthy economy. The real estate market and the banking system are much more established. The response speed and strength of the policy framework is greater than in the last time in decline.
Therefore, although the coronavirus’s impact has not yet been determined, it is not as destructive or persistent as the huge financial crisis. Many economists predict a “V” shape (or “U” shape) recovery instead of the “L” shape ten years ago.
The cancellation of the lock-in measures should result in discrete growth inactivity, and some expenditures can be re-recorded starting in the first half of this year. Macro policy stimulus and inventory building should also help economic recovery. But the scale of displacement means that we do not intend to reach the level of GDP before the virus outbreak in the second half of 2021.
UK Real Estate Market
It is worth noting that after the decisive general election results in the first quarter, the UK housing market has shown very strong potential momentum, and UK sales and price growth have risen sharply.
Rightmove reported that in the month ended March 7, sales revenue increased by 17.8% year-on-year, and asking prices rose by approximately 3.5%.
Covid-19 and the lockdown have stalled this recovery, and near-term activity is expected to decrease sharply.
Assuming that the lockdown lasts until May and is gradually relaxed in June, Knight Frank expects that transaction volume in 2020 will drop by 38% to about 734,000, although they point out that if the lockdown does not last until June, the contraction may decrease.
According to Savills, the suppression of trading activities means that we expect potential demand to increase. The experience of working from home for long hours may drive many families to move.
Knight Frank predicts house prices will fall by only 3%, while Savills predicts house prices will fall by 5% to 10% (despite lower transaction volume).
Real Estate Development
At least, we know that many large American homebuilders voluntarily “press the pause button” for residential development (although the current government does not mandate this).
In some cases, some development lenders have recently “exited the transaction finish line” when evaluating their current loan accounts.
What worries the country, and the industry is that the funding gap faced by real estate developers (especially small and medium enterprises) will further expand, thereby pushing up their capital costs.
These dislocations can provide opportunities for lenders to continue to support the growth plans of development partners and obtain attractive risk-adjusted investment returns.
It is challenging to see lush trees in a crisis, and the natural fighting or escape instinct often says to escape.
However, in the market, this usually leads to poor analysis and decision making. By keeping a clear head while the person concerned is lost, we must rationally assess the current situation and observe its development. With risks and uncertainties will bring tremendous opportunities.