After the United States revealed its economy contracted by 4.8% during the first quarter of 2020, it was the turn of Western European countries to show the severity of the economic crisis triggered by the COVID-19 pandemic. As we’re about the see, the numbers are unprecedented in the past few decades, but at the same time, hopes are starting to build since economies start to open. I’m Ofir Eyal Bar, A real Estate Investor active in markets like South Africa, Germany, and the Netherlands and today we’ll navigate through the current state of the European economy as well as some implications for the real estate market.
Q1 economic figures slump
The Eurozone economy shrank at a record pace according to the latest data from Eurostat, falling 3.8% during Q1, more than it did during the 2008 financial crisis. Looking from a country-by-country basis, a 5.8% decline in French GDP was the largest since 1949. Negative figures had been seen in Spain and Italy, which had contracted by 5.1% and 4.7%, respectively. Germany, the largest economy in the EU, had not yet published GDP figures, but employment numbers had shown the country is also affected.
Approximately 373,000 people have been out of work in April and a record of 10.1 million workers are now on state-subsidized reduced hours terms. The European Central Bank (ECB) President Christine Lagarde warned a sharper economic downturn could follow in Q2, and the GDP could fall between 5% and 12% this year.
Real estate market conditions
Same as it happened during previous crises, a drop in economic activity is influencing people’s spending habits. The implications for the real estate market are expected to be asymmetric on the downside, given the long bull run we’ve witnessed since 2009. If unemployment will rise above the past crisis levels, then the current valuations of properties are unlikely to remain stable. In line with the economic developments, a gradual drop in real estate prices should not surprise us.
Governments had already taken unprecedented steps to stimulate economic activity using both fiscal and monetary measures. Although that will alleviate some pressure, people will be reluctant to spend a lot of money, until the pandemic will come to a close. As specialists are claiming, that won’t happen until a vaccine will be found. However, temporary cures are already emerging and that should bring down the fatality rate as well as the recovery period for mild COVID-19 cases.
Fewer people will look to buy a home and instead will choose rent. At the same time, companies will see their revenue dropping, putting new investments under a question mark. Still, the real estate could continue to expand even in 2020. A great example is the European data center market, which is projected to grow at a CAGR of over 1% between 2019-2025, according to Yahoo Finance.
Light at the end of the tunnel
Despite the negative economic numbers and their implications on the real estate, hope is starting to emerge. The mitigation measures had shown great results in terms of reducing the spread of the virus and as a result, Western European countries had already started to re-open their economy at a gradual pace.
That could mean the current depressed projections for the second quarter might be exaggerated, as long as the re-opening process will run smoothly, without a second strong wave of infections starting to build up. This is one of the major downside risks moving forward and it all depends on each individual’s ability to maintain social distancing measures and follow the recommendations provided by authorities.
Viewed from a longer-term perspective, the current economic downturn will provide plenty of new investment opportunities and we must be prepared to leverage them from now. Business cycles will continue to unfold, but it will be our commitment to innovate and adapt the main variables determining whether the outcome will turn out to be positive or negative.
