At some time last year, a bat passed on a mutated virus to a trafficked pangolin (a scaly ant-eater) in a wet market in Wuhan, China. Now, that same virus has spread to unknown thousands of people across the globe and there is only one topic at the top of the boardroom agenda: the Covid19 Coronavirus outbreak.
As Berkeley Group’s statement cancelling a forthcoming £500m shareholder dividend shows, increasingly developers, lenders and investors are going to have to take decisions around the risks the outbreak poses, and face up to some unpalatable options.
But long before the ill-fated pangolin’s revenge, the outlook for housing markets had already altered, largely unseen and unrecognised by many in the industry. The prospect for real estate values, including house prices, in coming decades was always going to be different in a world of low inflation and low, no longer falling, interest rates. High but stable prices and no-capital-value-growth-without-rental-growth are becoming the norm so some investors were waking up to the fact that all real estate has moved up the risk curve. Covid-19 will change the shape of that risk curve further.
In recent weeks I have been turning my mind to the potential ramifications for the residential sector – recognising that this is perhaps not the most pressing problem in the midst of the current emergency but something we can all think about while working from home or self-isolating. The potential issues multiply, the more you consider them, across a whole range of timescales and possible scenarios. Regardless of how severe the outbreak becomes, there will be a wide business impact from what has happened in China and elsewhere already. So, what are the principle issues for the sector?
The first was addressed by the chancellor Rishi Sunak in his Budget and by the Bank of England with its rate cut yesterday: a short-term recession. House builders will be only one of many parts of the economy affected – as can be seen in recent share price falls. Home purchases will be among the first decisions to be put on hold in the event of both social and economic uncertainty. The severity of any recession will vary according to the length of any lockdown and degree of productivity loss, including losses from breaks in the global supply chain. Impacts will range from low consumer confidence, which translates into lower housing demand, to falling incomes and further affordability pressures.