Coronavirus and its consequences for real estate in Europe
The situation is serious. The whole of northern Italy is now in lockdown, Austria has closed its border with Italy, many EU countries have now forbidden meetings of more than 500 or 1,000 people, and football matches are being played to closed stadiums.
For investors, the risk of illness or mortality, and the disruption of daily business, has been accompanied by a precipitous slide in global stock markets. The New York Stock Exchange invoked its 'short circuit' rules after a 7% dive in share prices, the French CAC40 fell over 4% and the FTSE 100, at its worst, crashed 10% before closing its worst day since the 2008 credit crunch 7% down.
Investors who put their money into property rather than stocks might be feeling superior.
But what might COVID-19 mean for property markets - both in the short term and longer-term?
Expert opinion (IAD Portugal)
Alfredo Valente, general manager:
"The Portuguese government is closely monitoring the Coronavirus situation and taking the appropriate measures to avoid the spread of the epidemic which is, for the moment, under control. If you take basic protection measures you can still live a perfectly normal life in Portugal.
On the other hand, buying a property is typically a long term investment, that shouldn’t be affected by short term constraints.
Besides, our real estate agents are very well informed and can guide you to a perfectly safe transaction even in more delicate situations as this one.”
Practicalities
Practically, there is no doubt that doing transactions will become more difficult. For instance, if you wanted to buy a luxury apartment in Venice, you won't be able to go and see it. Some investors are happy buying properties sight unseen - but they're definitely in the minority.
'Open houses' in particular may become a thing of the past. Right now the last thing anyone wants to do is stand in a flat with thirty or forty other people. Estate agents who've used the open house event as a way to reduce the costs of viewings may need to think again.
On the other hand there's certainly technology available to help remote property buyers. For instance, many agents can now offer 360 degree photos and 'virtual tours' accessible on your smartphone - a fantastic way to check out properties without needing to be physically present. (But in China, even though full virtual tours are available to a greater extent than is the case in many European markets, clients haven't been happy to buy virtually, and transactions have flatlined - so this isn't a panacea.)
Some European countries also have legal systems that still envisage buyers being physically present for the signing of contracts. For instance, that's the case in France where notaries generally require both buyer and seller to be present at the signing of the 'acte authentique'. However, more go-ahead notaries are now using electronic signatures to allow virtual signings - definitely something you should ask about.
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New developments could be hit
Developers are in a fix. While currently they're able to keep working, a major epidemic could force them to mothball many sites. But right now, the difficulty is that they may not be able to sell.
Some developers will opt to slash their prices in order to ensure they have enough cash flow to pay the bills. Others will hold on, delaying product launches and hoping to get better prices once the threat of coronavirus has receded. The decision may be strategic, but it's likely to be driven by the strength of the developer's balance sheet - does the developer have the financial firepower to outlast the virus?
That suggests there could be some good bargains for cash buyers. In Singapore, during the SARS epidemic, there were reports of some buyers getting discounts of 20-30%, particularly larger buyers who were able to take multiple units. For experienced investors with long pockets, this may be a good time to set out to find the right projects, and negotiate tough terms.
Of course it's also possible that some cash-poor developers will actually fold. We'd be careful to ensure that any investment in off-plan property is well protected by escrow accounts or insurance - otherwise the apparent bargain might turn out to be anything but.
Longer term effect
Property isn't like the stock market. It's illiquid - you can't just sell everything by clicking a button - and house prices are less volatile than share prices. However, that hasn't stopped property being affected by previous epidemics.
For instance SARS in 2003 saw house prices fall 8% in Hong Kong, and more than 10% in Singapore. However, by 2003 the property market was already on the skids - the bursting of the dot-com bubble and the US recession had already taken the heat out of the economy. This time round, Coronavirus is taking on stock markets at an all-time high and buoyant property markets that have benefited from ten years of low interest rates. There could, potentially, be further to fall. Estate agency Savills is looking at a potential 10-20% fall in Hong Kong this time round, for instance.
If coronavirus - or the measures taken to prevent its spread - inhibits economic growth, we're likely to see residential property prices track lower over the long term. In areas not directly affected, the impact could be modest. However, some property sectors are highly exposed to Chinese money, and if the coronavirus effect exacerbates a Chinese economic slowdown, they could suffer more than other areas.
Major cities such as Lisbon, Madrid, Barcelona and Athens have been huge focuses of Chinese buying, particularly driven by 'golden visa' schemes which offer a resident's permit for a given size of real estate investment.
While Chinese buyers have also focused on Paris, this much larger market is less dependent on foreign demand; only 11% of purchases in the petite couronne are made by foreigners. However, Chinese buyers are more present in the 3rd and 13th arrondissements, which might see some impact.
Looking for the rebound effect
One thing that studies on the impact of SARS show is that practically everyone who bought property during that period made money on their deals within five years - some of them getting a very significantly above average return.
The possibility of a strong rebound could be even greater given government stimulus to kick-start the economy. In the US, the Fed has already cut interest rates by 50 basis points to 1.25%, and many commentators expect rates to hit zero. In Italy, the government is using direct financial stimulus - mortgage and tax payments will be paused, and it seems likely that smaller companies in affected areas will benefit from handouts to ensure their survival.
However, the Singapore market didn't rebound till 2006 - three years after the peak of the crisis. If you want to play the Coronavirus rebound game, you'll need to be absolutely certain that you can hang on in there for the long term.
If you've already planned your purchase
If you've already planned to buy a property, and you have your budget and finances in shape, you might be wondering whether you should still go ahead.
Our answer would be yes - but take advantage of any opportunities that arise. For instance, if you're just starting looking, use agents and developers who have fully embraced the opportunities of new technology and can deliver virtual tours and electronic paperwork. (You might also be able to use an in-country representative such as a lawyer to view your chosen property as a final check.) If you've found the right property, you might want to negotiate on price, particularly if you're able to complete the purchase quickly.
Signs from both China and South Korea suggest that while it's incredibly disruptive in the short term, coronavirus can be beaten. If a property was a good investment before coronavirus, it's a pretty good bet that it will remain a good investment after coronavirus - so keep a level head, and stay the course!