“What do you think the impact of coronavirus will be on real estate?”
According to the latest communications from the WHO it appears that the number of new cases from the epicentre are starting to peak as, thankfully, are the number of fatalities. However, there is still no doubt that the effects of coronavirus (COVID-19) are likely to carry through to the middle of the year. Perhaps the two biggest impacts are the significant restrictions on global travel and the slow down of manufacturing output from China; both of which have significant repercussions for global trade.
Within the International Project Marketing (IPM) space, the impact is also being felt. There are likely to be both effects in the short to medium term and potentially longer-term impacts if COVID-19 spreads further.
Short to Medium Term impact on Real Estate
We have already witnessed developers from most locations either cancel or significantly curtail launches for new projects. Some may try and get to market before the September sales season. However, most developers will not risk their capital on an expensive high-profile real estate launches across Asia without a greater guarantee of attendance at launches. This will ultimately mean the following:
Pent up demand from developers to go to market, will likely result in September, October and November witnessing a significant amount of developers exhibiting across Asia. The increased competition will no doubt create a competitive environment between developers which will lead to some discounting. The amount at which they are willing, and able, to trade at a ‘discount’ will be driven as follows:
Buyer Demand – increased demand for offshore investment will likely also be a by-product of COVID 19. Where that investment goes may also change; particularly in respect of China, where demand may increase for assets from countries offering VISA programs.
Market Access Costs – property exhibitions are very expensive, with a typical exhibition costing north of USD 250,000. Costs to access markets may increase significantly as those involved in the event marketing industry increase costs; both due to demand and to offset lost revenue. Increased costs will limit the ability of developers to trade.
China Impact – often understated is how Chinese purchasers impact on the international residential property market. Chinese buyers now account for a significant proportion of Asian investors. The consequence of COVID-19 may well be:
- Chinese buyers find it more difficult to get RMB out of the country as the Chinese government seek to protect their own economy in order to help it recover from the impact of coronavirus. Additionally, this may make sales completions challenging for developers who have previously sold to Chinese buyers.
- Chinese buyers may seek to purchase property in the PRC rather than offshore, both in an act of patriotism and also because Chinese developers are likely to discount domestically (China Evergrande have already reportedly discounted prices by 25%)
Longer Term impacts on Real Estate
Over the longer term, the impact of COVID-19 will be a supply dampening effect on housing markets from Australia and the UK particularly which have a reliance on Asian buyers. Ultimately, what is likely to be a six-month halt in Asian sales will impact on the ability at which developers can produce ‘stock’ for offshore consumption. Additionally, some developers may be further impacted by a lack of materials for production from Chinese suppliers.
This slow-down in supply may impact pricing in markets already unable to meet existing demand for housing stock which will either further underpin or increase housing costs.
Should I wait or Buy?
I guess this was really the question. The short-term impact creates neither a good nor bad time to buy and clearly there are many repercussions both to the individual and to global economies from such a tricky situation. There are likely to be good deals out there both now and in the future. As an investor, really understanding the dynamics of the market for which you intend to buy will determine whether or not a good deal is being achieved.
In my experience the really high performing investors I have worked with knew their markets well; and it was more about the deals they refused, using their understanding of the markets in which they were operating to find the right deal.