COVID-19’s impact on markets and geopolitics

“Drawing on my experience from ten years ago, it was critical to build and maintain confidence”, explains Alistair Darling, Chair of the International Valuation Standards Council, and UK Chancellor of the Exchequer from 2007 to 2010.

RICS recently convened a panel of leading experts to analyse the impact the pandemic is having on the global economy and geopolitical landscape, how real estate is being impacted, and what structural changes it will bring in the future.

Central to the debate was the need for international co-operation to overcome, and recover from, the effects of COVID-19, whether among governments, institutions, and individuals. Darling saw international co-operation as the critical issue that allowed an effective response to the Global Financial Crisis. In 2008, he says, governments were “all in complete agreement as to what they needed to do to get our economies moving and stop recession becoming a depression”. This allowed them to demonstrate they were in control, and had a plan of action – crucial to building the public confidence needed for economic recovery. He does not believe we are there yet. Darling cites an immediate need to focus on the swift and effective delivery of measures announced by governments, whether on control, prevention or economic support to allow economies to move into the recovery phase. 

The question of instilling confidence, however, is not limited to co-operation to government policy. Take valuations, for instance. As Darling notes, dealing with unpredicted circumstances for an uncertain amount of time, valuing assets becomes even more complicated. He highlights the need for international co-operation and the sharing of best practice, in order to build confidence in valuations. The same is true more broadly in the response to the pandemic.  

Have international governments done enough?

Whether governments have taken sufficiently co-ordinated action to build and maintain confidence more widely remains to be seen. Susanne Eickermann, German Real Estate Leader for PwC, points to the pressure the European Union has come under for its response to the crisis, citing a lack of co- European co-ordination when it came to controls such as border closures. Collaborative planning and action will be all the more vital as countries consider loosening restrictions. 

Simon Rubinsohn, Chief Economist at RICS notes that the action taken by policymakers so far has been “substantial in magnitude, rapid in delivery”, and can be seen as “truly radical”. However, he wonders whether there was complacency at the onset of the pandemic, with the commonly held assumption of a quick V-shaped recovery proving far too optimistic. Indeed, he foresees a battle to get the global economy moving again and suggested it will be a hard-fought expansion, with the global economy “living with the scars of the pandemic for years to come”. Indeed, Eickermann sees GDP in Germany falling by 7-10%, perhaps more in other parts of Europe in spite of the stimulus measures undertaken by the EU. 

The shape of future recovery and response

Looking to China may provide policymakers some guidance for the shape of recovery. Andrew Tilton, Chief Asia Economist for Goldman Sachs, highlighted that China should was “first in” and should be seen as “first out” of the immediate economic crisis, noting that at its peak of the outbreak, the economy was off nearly 20%.

 Though there are signs of improvement in China, recovery won’t be overnight, and we also must bear in mind the risk of a second wave. Goldman Sachs doesn’t expect the Chinese economy to be back to its Q1 2020 level until the end of the year – and early next year for the rest of Asia as those still in lockdown lag behind. Further support from the Chinese government is expected. Traditional monetary and fiscal stimulus has already taken place, and Tilton believes more is coming. He points out the front loading of government bond issuance, oft associated with infrastructure spend, and highlights the need for measures to protect against unemployment and boost SME’s credit.

The experience of China also shows that economic recovery won’t be even across sectors. Tilton highlights the faster speed of recovery in the industrial sector, where social measures are easier to introduce, while services will take longer to recover. Activities that are seen as digressionary by the authorities – such as gym use – will take longer to normalise. 

China’s experience may also point to future upheaval in supply chains. Tilton believes China is concerned that the pandemic has exposed the vulnerability in global supply chains, which may affect future investment in the area. It does seem probable that countries will build more insurance capacity into their supply chains, while we may see trends of local sourcing and nearshoring – all of which have ramifications for the global built environment.

What next for real estate?

In the face of such geopolitical and economic upheaval, real estate faces both short-term challenges, and long-term structural changes. The sector has naturally been shaken by the impact of COVID-19, government lockdowns, and an immediate change in consumer behaviour. Our latest Global Commercial Property Monitor shows that confidence has fallen drastically among investors and occupiers alike, while respondents in the sector expect more pain ahead, expectations for capital and rental values over the next 12 months falling sharply. 

The impacts won’t be uniform across real estate. Eickermann sees different economic scenarios for different parts of the industry. She holds a somewhat of a neutral outlook for residential, but non-food retail may face a U-shape or a L-shape recovery, given its existing pre-Covid-19 issues. Hotels could see an L-shape recovery, factoring in less travel, and changes to consumer behaviour. In the short-term, she argues offices may see a V-shape scenario. While they typically have long-term leases, occupiers are seeing short-term cashflow constraints. In the longer run, the widespread adoption of technology-enabled remote working will drive a re-think towards the use of office space.

Structural change seems inevitable. Rubinsohn states that the advent of Covid-19 has “turbocharged” the debate around trends in real estate, not least the rise of ecommerce and debate around how office space is used. He believes there will be pain ahead for the sector as it is reconfigured, with reducing retail and office space, but this will make the sector more fit for the 21st century, building resilience for the future. But how will existing estate will be repurposed? Rubinsohn argues that the reconfiguration of global real estate may provide the means to tackle the housing affordability crisis in many global cities. As Eickermann surmises “crisis moments also produce opportunities...The real estate industry is a good example of how we must adapt to new requirements.”