The property industry faces a ‘U’ shaped recession, which will lead to investors reshaping portfolios with liquidity in mind.
In early April, the PMI indices from IHS Markit were released for most leading economies, and they were alarming. The index convention is that a reading of under 50.0 indicates an economic contraction, and the composite UK index read at 36.0 for March 2020, the Eurozone at 29.7, and Italy at 20.2. Lockdowns to slow the spread of Covid-19 have choked off business activity, and much of the world is probably now in recession.
The UK government has indicated some degree of social distancing measures may last through the summer, a step that other nations will also have to consider. This could mean either a prolonged recession, or a slow return to growth.
Investors have not only fled from equities, but also the traditional safe haven of government bonds; so, cash is king. For real estate, the warning lights indicating a market downturn are flashing. Funds are gating, tenants are asking for rent holidays, while pricing property is guesswork. Some deals are still going through, although these transactions were probably at an advanced stage prior to the lockdowns.
So, what is the outlook?
V, U or L?
The question high on minds is whether the shape of the recession will be a ‘V’ (short and sharp), ‘U’ (sharply down, flat for a while, then recovery), or ‘L’ (a hard fall, then stagnation). In the SARS outbreak of 2003, Hong Kong saw 22% of the cases, and its economy experienced a ‘V’ shaped contraction. Yet, the Covid-19 pandemic has long since overshadowed SARS in both number of cases and global spread, leaving a ‘V’ shaped recession looking unlikely now.
The Spanish flu outbreak of 1918-19 was accompanied by a deep ‘L’ shaped recession. However, that pandemic coincided with the economic dislocation following World War One, as industries adjusted from wartime to peacetime production. Moreover, the stimulus packages announced by governments in 2020 in response to Covid-19, and central bank largesse, should help kickstart major economies once the lockdowns lift.