Coronavirus Impacts Stock Market as Investors Turn to Property
Coronavirus continues to spread across the world and infections are now being reported in at least 170 countries and territories. As social distancing measures are adopted across the globe, the effects on both the global economy and investment markets are being pulled into sharp focus.
Officially labelled a pandemic by the World Health Organisation (WHO) on March 11th, stock markets have reacted to COVID-19 accordingly – investors back-pedalled to reduce the impact of losses and the effects have been felt across the globe.
Wall Street entered a steep slump on March 11th, falling so quickly that the Dow Jones Industrial Average (Dow Jones) simultaneously entered a bear market and ended an 11-year rally. At the same time, major businesses such as Goldman Sachs, Apple and Microsoft have confirmed that Coronavirus will officially impact their profits negatively, demonstrating just how far-reaching the effects are being felt.
The rapid decrease of the Dow Jones is estimated to represent a 20% fall from record highs which it only achieved less than a month ago. As the WHO reinforces that countries aren’t working quickly enough to fight the rapid spread of the disease, the volatility of the market has reacted just as aggressively.
With all 11 S&P stock markets turning negative on March 11th and all 30 Dow Jones components deeply negative, experts predict that this downturn for the stock market may continue. For many investors, this has signalled a reason to pivot quickly to more stable asset classes.
Investors Look to Property for Security
When it comes to the investment market, Coronavirus has highlighted the volatility of stocks compared to property. It’s also had the secondary effect of demonstrating just how much investor sentiment influences the overall market, including spikes due to short-term influence and fear.
Real estate, on the other hand, is typically viewed as a much more robust asset and cited by JP Morgan as a “safe haven asset”. Over the last 20 years, real estate has outperformed the stock market by two to one, meaning investors that adopted property investments 20 years ago have made significantly better gains.
This has demonstrated two fundamentals of property: the asset is designed for long-term returns and is typically much more resistant to sudden market change that can throw other assets into chaos.
Real estate, whilst less liquid, is also seen as a much more tangible asset. It can be easily diversified, managed remotely and deliver consistent, measurable returns. While stocks can generally only deliver one source of income, property is able to provide passive returns through rental yields alongside capital appreciation in the market.
How Could Coronavirus Affect the UK Property Market?
Whilst none of us can predict the future or with any certainty forecast exactly what will happen the main impact of COVID-19, aside from the critical health and safety concerns, is its effect socially – already we’re seeing the outbreak highlighting the evolution of how we live and work.
The residential sector hasn’t gone unaffected, although from an investment perspective real estate still typically holds ‘defensive characteristics’. It benefits from stable cash flows as well as the flexibility to maintain optimal occupancy and mitigate void periods.
Demand for residential investment property is also generally resilient to economic shocks, which is expected to be a secondary impact of COVID-19. While reduced mobility will no doubt affect property transaction levels, expert forecasts from JLL seem to suggest a similar situation to that of the SARS outbreak in 2003 – a short, global shock to the worldwide economy followed by a bounce-back in the second half of the year.
Naturally, there are lessons we can take from historical outbreaks that may apply to the present day. During the SARS crisis, Hong Kong – which was one of the most significantly hit regions – experienced a 1.6% decrease in house prices, although it could be argued that SARS simply accelerated a downward trend that was being felt in the market prior to the outbreak.
Transaction volumes in Hong Kong fell more dramatically, between 33 – 72% due to social distancing. After the outbreak was contained, these transactions – much like the economy itself – snapped back almost immediately. This could be explained by the ‘wait-and-see’ approach that some investors take amidst uncertain markets, as small price reductions coincide with a wider reduction in volumes.
While ‘lockdown rules’ have been felt more immediately by the retail and hospitality sectors, the housing industry is typically more resilient and JLL believe that although uncertainty may play a part in investor purchases – especially in international markets – technology can mitigate these challenges with online ‘virtual’ viewings and digital transaction technology. This may also help accelerate plans for online transaction platforms that many vendors may have in the pipeline.
To conclude, as each day brings new cases and more uncertainty, it’s likely that more investors will be looking for a more stable investment environment. For those identifying an alternative, the UK could represent a relatively safe haven given the government’s repeated assurances and unprecedented financial support packages – robust enough to deal with the impact to the economy and supporting the signs of exceptional growth prior to the outbreak.
At the same time, although it’s easy to concentrate on short-term economic signposts of how COVID-19 might affect the market, historical data shows that the economy, and particularly property, recovers over the long-term. The aftermath of this outbreak could even lead to a change in the way we live and work, potentially leading to new operational models in terms of working from home, shared living and co-working spaces – all trends emerging strongly in 2020.