As a result of the spread of COVID-19, life has changed significantly for everyone over the past few weeks. Across the world, governments have instituted strict curbs on movement in order to halt the spread of the virus, leaving many unable to work. The reality of the situation pervades almost every area of life, and the economy is certainly not isolated, economist unfortunately already predicting a slowdown akin to 2008. It has been, however, heartening to see the response of many who have valiantly stepped in to help the more vulnerable among us in society, especially in the UK where over 750,000 people have signed up to volunteer for the National Health Service.
With regard to the macroeconomy, it appears that an economic shock is more than likely, with Chancellor Rishi Sunak foreseeing a contraction in GDP of 25-30% in spite of historic liquidity injection, grants and low-cost loans. Such is the unprecedented nature of the situation that economists are using proxy data to measure the situation, with some methods suggesting that UK national income saw a 0.1% in the first week of April. Currently, experts appear to be factoring the prospect of a short but intense contraction in economic activity, with positive growth returning by Q4 this year.It is the sudden nature of the situation that is contributing turbulence seen in markets, with investors searching for an elusive safe haven amid a flood of imprecise of information. In short, the mechanism by which equity and debt markets traditionally function is being undermined by a significant and sudden halt in economic activity.
No sector has managed to escape the effects of the pandemic, not least the UK real estate market. Tenants and landlords alike are suffering, with lockdown rules often hampering the payment of rent. Here at Yielders, we applaud the action taken by the government to suspend evictions from social or private rented accommodation and grant landlords a 3 month mortgage payment holiday, seeing them as important measures to protect people in what will be a considerably difficult period for many in the industry. Taking a wider view, the Center for Economics and Business Research (CEBR) cautioned to homeowners that house prices could realise a 13% hit by the end of the year as a result of the suspension of the market.
That said, it is not all doom and gloom. There are certainly some bright spots when considering the industry’s resilience compared to other forms of investment. To start, there are currently extensive buying opportunities in otherwise turbulent market conditions, given a considerable reduction in liquidity is likely. We are preparing to take advantage of this fact as soon as the markets open up again, with the investment team screening a number of candidate assets for listing on the platform. Second, house prices may be falling, but they will not stay low forever. Like many markets, the property market is fundamentally cyclical, meaning that highs and lows are inevitable. Unlike 2008, the current property price crash has been caused by an ‘endogenous shock’, i.e. the pandemic originating externally from the market and as growth returns, as will residential real estate demand, which will therefore buoy house prices. The majority of Yielders’ assets still have between 3-5 years remaining before they are due to exit, giving them plenty of time for the housing market to recover from what is seen as a short term shock.
Savills is predicting “modest falls in average private rents paid as some landlords act to help tenants in financial distress”. However “for the majority of households, rental payments will continue as normal with no significant impact on rental values in the short term”. Ultimately, rental value growth tends to occur hand-in-hand with income growth, therefore we can expect growth in this area to slow but pick up again with economic growth after restrictions are lifted. We will be working closely with our property management partners to bring clarity to dividend payments that can be expected over the coming months, with individual updates for each asset.
Ultimately, we believe that as an investor, property is a wise asset to be invested in, in the long term regardless of the economic climate due to the ultimate resilience of the UK market. However, whatever your plans at this difficult time, the Yielders team is here to support you as an investor.