Business

COVID-19 Crisis and How it is Impacting Real Estate Market

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The saying “there isn’t a place as home” is probably not as heartwarming a consideration these days.

All things considered, a shift to working from home and also much less commuting during the pandemic has transformed what people really want in a property. Many Britons are moving out of big cities to smaller towns or more rural areas, in search of bigger houses, home offices, gardens and also eco-friendly surroundings. When offices reopen, many people look to continue working from home for at least part of the time.

The coronavirus crisis will, nonetheless, do much more than alter how we may feel about our homes. It has the possibility to have a big impact on property markets around the world.

It’s fairly clear that with job uncertainty, business failures, wage cuts, and massive unemployment, lots of people will probably be cautious about making the biggest investment of their lives – buying a house.

Normally that results in falling house prices, and also during the last recession and credit crunch, that’s what we observed in the UK, US, and several other countries.

In the UK, Nationwide home price index for January 2021 showed that prices fell 0.3 % from the prior month, the first monthly decline since June.

But as Robert Gardner, Nationwide’s chief economist, points out, “The typical relationship between the housing market and broader economic trends has broken down over the past nine months. This is because many peoples’ housing needs have changed as a direct result of the pandemic, with many opting to move to less densely populated locations or property types, despite the sharp economic slowdown and the uncertain outlook.

Rather, the UK authorities – like others around the world – consciously decided to place a lot of the economic system on hold. This was simultaneous as putting in position a multitude of steps to support companies and households, like the worker furloughing scheme.

The hope, therefore, is that as lockdown restrictions continue to be lifted, economies and housing markets will rebound.

In the US, house prices continue to be rising. “Many areas [of the country] have placed a moratorium on evictions, usually for sixty to ninety days, but in several places for 6 months,” says Prof Nori Gerardo Lietz, who teaches real estate investment at Harvard Business School.

This means that the immediate issues are pushed on to landlords and the banks, and that is not to suggest that there will not be difficulty further down the line. Especially as the US unemployment rate remains high since the coronavirus crises – 6.2% for February 2021, albeit down from 14.7 % in April 2020.

Nevertheless, behind those headline figures, you can find some other forces at work in the property sector. A lot of us have abruptly realized that we are able to work at home as well as stay away from the office environment along with the travel time, and this is currently having an impact on the market.

Rightmove, the UK home site, has reported a significant rise in the number of individuals considering buying a house or looking for homes further from town and city centers, with much larger rooms and gardens for a home office. This might not be a lasting modification, but coronavirus is definitely making so many people think about where and how they work and live.

For the commercial property sector, the modifications are much more remarkable, particularly on the UK’s High Streets.

“Retail [in the UK] has experienced trouble for ages,” says Prof Michael White, an expert in real estate economics, at Nottingham Trent University. “And at the moment incomes are obviously being hit by furloughs, and then there will be a squeeze on spending in a recession.”

It indicates an acceleration of what we saw prior to the virus struck – many High Streets are been decaying for many years. And now that many more of us have discovered how much we are able to purchase online that is only going to increase in speed.

An additional issue would be that before coronavirus, the pattern was already towards fewer shops on the High Street, and more services – items you cannot buy online – like cafes, beauticians and hairdressers.

“The twist is that these services have been hit, therefore we’ve noticed a retarding of an expanding trend,” says Prof Andrew Baum, who leads the Future of Real Estate Initiative at Oxford University’s Said Business School.

What this means is that High Streets happen to be hit two times as hard – many shops are shut and face-to-face service suppliers have almost totally closed.

The end result continues to be an increase in rent arrears. If this is simply a question of landlords deferring or missing only one or 2 quarters of rents, that’s not a great problem for the market.

But if this is the beginning of a long-range pattern then that is going to cause issues, in addition to perhaps a knock-on fall in the capital value of many retail properties, possibly by 20%-30% believes Prof Baum.

In the US, wherever there continues to be a very similar movement within the retail industry, the issue is somewhat different. As land is very inexpensive and also planning permission so simple to buy, there is a long tradition of retail malls and parks being abandoned if they’re not making some money, or maybe cost a lot to upgrade. The impact of coronavirus could see this trend increase.

“The problem with US retail is not that it’s overbuilt, but that it is under demolished,” says Prof Gerardo Lietz.

For providers of office space, if coronavirus happens to be a one-off hit, with only 2 quarters of rents deferred, there is very little reason behind property values being influenced at all.

But instead, coronavirus may have an enormous impact on the sector. All things considered, if the real estate market changes as individuals search for more suburban and rural properties where they are able to work at home, there’ll be much less demand for office space to operate in.

The office property market will thus need to adjust, something Prof White believes the industry is good at.

As he explains, in case you strip out inflation, “average rents in London are exactly the same as they had been hundred years ago”. He says this shows that the office property market has been very good at matching supply and demand for a very long period of time.

As the UK’s capital needed more offices in the 1950s and 1960s, a lot of the townhouses of the West End have been switched from residential to business use. Next, the City of London was rebuilt in the 1980s, with skyscrapers appearing, and Canary Wharf was built in London’s former docklands in the 1990s.

Lately, as London has required much more accommodation, buildings like office blocks happen to be turned back to apartments & flat shoes.

Overall, the property’s current market has two things going for it in these changing times.

The first is that even when the cost of a property falls, it might still be a wise investment. This might seem perverse, but home is a long-term investment, and very few others are both secure and pay a great return.

And so in case, if government bonds are paying 0.5 % interest a year, or maybe actually much less, and also home is making 3-5 %, you still have a good source of income if you’re a private investor or even a global investment fund.

Amenorhu kwaku
Amenorhu Kwaku
Founder at | Website | + posts

Amenorhu kwaku is an author, internet marketer and entrepreneur. He is the founder of SuccessValley, a network community for students and aspiring entrepreneurs