Which European country to emerge strongest from COVID-19?

April 15, 2020

The World Trade Organisation expects global trade to contract by more than during the financial crisis. And the IMF believes the coronavirus crisis will exact the biggest toll on the global economy since the 1930s Great Depression, with advanced economies contracting by 6.1 per cent and emerging economies by 1 per cent in 2020.

Which country will emerge strongest for property investors?

Globe of European country flags

As Continental Europe makes tentative steps to break its quarantine, with Austria, Spain and Italy loosening some of its rules, France, UK and Germany watch closely to help inform their pathways to normalcy. Brussels is expected to present an EU-wide blueprint for lifting restrictions for a co-ordinated exit.  

France – a favourite for lifestyle investors

Emmanuel Macron is preparing to gradually lift isolation orders in May, which currently stipulate  people can leave their homes only to go to work, buy essential supplies, help the vulnerable, seek treatment or take exercise nearby for an hour a day, alongside a curfew.

For every week in confinement in March, French business activity dropped by about a third, the central bank said. The decline in the French economy is set to be of a similar scale to the second quarter of 1968, when gross domestic product fell 5.3 per cent because of the impact of a student-led protest movement (according to the Central Bank)

The property market in France is highly regulated and prices are – on the whole – more stable than some other European countries. Bigger cities and places which attract international holiday makers have tended to see more buoyant prices in the recent past, like Paris, international ski resorts like Chamonix and holiday home hot spots like the Côte d’Azur. Prices in these sought-after places have further to fall, so if unemployment hits other countries badly, there are likely to be less international buyers and prices could fall.

Italy charms property lovers

Italy’s gross domestic product is expected to fall by 6% this year (Confindustria’s forecast) and public debt reach towards 150% of GDP, with thousands of its 60 million population seeking state-backed income support schemes.

Italy has been pushing – alongside Spain – for a financial support package to support the Southern European countries which have been harder hit than the Northern countries. The current offer of a €500bn economic package involving the region’s European Stability Mechanism bailout fund has caused anxiety in Italy given the suspected stringent repayment conditions that might be levied.

Italy did not win any explicit reference to the concept of “coronabonds” — jointly issued debt underwritten by eurozone member States. 

Property prices in tourist hot spots like the Amalfi coast or Tuscany or its Lakes, might come under pressure.

Germany renowned for stability

Germany’s economy will shrink by almost 10 per cent in the three months to June, according to the country’s top economic research institutes — the sharpest decline since quarterly national accounts began in 1970 and double the size of the biggest drop in the 2008 financial crisis. But some forecasts then see it rebounding in 2021 with growth of 5.8 per cent.

Both Germany and France showed weaker economies pre-Covid-19. Germany narrowly avoided a recession in 2019 as its manufacturing industry was hit by the US-China trade war. France’s economy contracted in Q4 2019 as a result of widespread strikes and protests.

One buoyant part of the German economy was the service sector, but this crisis is affecting services harder than manufacturing, as industrial production has continued. 

The crisis is expected to increase the number of unemployed people in Germany by 236,000 to 2.5m, pushing the jobless rate up from c. 5 per cent to c. 5.5 per cent. That would remain well below the jobless levels of many other eurozone countries; the bloc’s overall unemployment rate recently hit a 12-year low of 7.4 per cent.

The aid package in response to the crisis will push the country into its first budget deficit for several years, equal to 4.7 per cent of GDP, increasing public debt from c.60 per cent of GDP to 70 per cent.

In Germany the proportion of people who have died after a corona diagnosis is just 2 per cent, compared with 13 per cent in Italy and 10 per cent in Spain.

Property in Germany’s main cities like Berlin have performed well for investors over the last few years, particularly for non-domestic investors looking for an alternative stable housing market in the lead up to Brexit. Property prices in these cities may well cool as international buyers take stock.

UK – in demand among expat investors

GDP is forecast to decline by just over 5% by the IMF, slightly more than Germany and France.

A three-month lockdown could cause government borrowing to rise by £218bn to £273bn in 2020-21. That would take the deficit to 14 per cent of gross domestic product, the highest since the second world war and well above the financial crisis peak of 10 per cent (OBR).

Comparisons have been drawn with the Credit crunch of 2008. During the credit crisis UK property prices declined 19% from a peak in Sept 2007 to a trough in March 2009 (Land Registry).  But the UK government stimulus now is more than tenfold the stimulus package in 2008 and it is this which will help determine how quickly and by how much the economy recovers by.

Regarding property, experts predict transactions will fall by 60 per cent in Q2 reaching a nadir in June. The Royal Institution of Chartered Surveyors predicts a drop in sales to the lowest level seen in 20 years. 

On prices – Estate agent Savills predicts a fall of between 5 and 10 per cent in the short term, with prices cushioned by low interest rates and lenders’ flexibility on arrears, reducing forced sales. The longer term impact on prices is likely to depend heavily on economic factors such as growth, earnings and unemployment. 

The UK has long had a supply: demand imbalance and the building industry has been trying to keep up with the annual supply of houses. That remains the case and is now exacerbated by vendors not being able to come to market. A significant risk currently is delays in new schemes coming to market, with different parts of the supply chain getting back up to speed after the crisis.

Some expats are still considering their investment plans given the introduction of the 2% stamp duty land tax surcharge for non-UK residents from April 2021.

Spain a big holiday home market

Spain’s economy is possibly set to suffer the most from coronavirus crisis. With limited fiscal room for manoeuvre, Pedro Sánchez’s Socialist government needs help from the EU.

Recent UniCredit research suggests that Spain is set to suffer more from the crisis than any other European economy, estimating a 15.5 per cent decline in gross domestic product in 2020 and create a fiscal deficit of 12.5 per cent of GDP.

Other economists argue that a 10 per cent drop in output and a deficit of 10 per cent of GDP are likely. That would bring total debt to at least 120 per cent of GDP — up from a previous level of just under 100 per cent — even before measures to rebuild the economy are contemplated.

Social security figures at the beginning of April showed that more than 800,000 people have already lost their jobs out of a labour force of around 19m. Unemployment in Spain was already 14 per cent before the crisis hit.

Such figures are a big reason why, despite resistance from northern Europe, Madrid is pushing for mutualisation of debt and EU-backed “coronabonds”. Whilst a €500bn financial package has been agreed, it falls short of this sharing of debt pushed for by Spain and Italy.

Spain’s economy is particularly vulnerable, owing to the high proportion of people on temporary contracts – the highest level in the EU – which has already declined by 17 per cent, compared with just a 2 per cent fall in permanently employed staff. The reliance on the service sector, including tourism, which has been knocked badly and the preponderance of small and medium-sized businesses.

Spain has limited room for manoeuvre and has been less generous than other European countries; companies are required to go on paying salaries on the understanding that their employees will make up lost hours before the end of the year.

Spain’s €100bn loan-guarantee scheme for businesses falls far short of the UK’s £330bn programme, let alone Germany which has no upper limit in place currently.

By the end of March Spain had put in place discretionary fiscal measures and guarantees worth around 12 per cent of GDP, compared to 18 per cent in the UK, 23 per cent in France and closer to 60 per cent in Germany (Think Tank Bruegel).

Conclusion on European investor markets

Many countries in Europe will need to pay for the financial support packages offered to their citizens and businesses and so this is likely to impact local taxation in a number of European countries. Southern European countries might struggle more than the Northern ones to recover.

First-time buyers and investors might be affected more in the aftermath of COVID-19, given they tend to seek higher loan-to-value mortgages. Lenders are adjusting and tweaking their offers on a daily basis to encourage or stem the flow of business as circumstances change. Lenders which have been traditionally conservative in some countries, like Germany or Poland, maybe even more so immediately after Covid-19. On the upside, we could be living with another 3-5 years of ultra low interest rates, which will ease the borrowing situation.

In the UK, several years’ of price stagnation after the Brexit referendum in 2016 may cushion the housing market in the UK and prices. What’s more there is still an imbalance of supply and demand in the UK.

The key is to plan ahead, understand and prepare for these eventualities as an investor.

Source: Mainly FT

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