covid-19...table 1: global bank rates, selected countries/regions country current rate last move...

COVID-19 and Global Commercial Property Trends

COVID-19 and Global Commercial Property Trends | Colliers international

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Contents

01. THE GLOBAL ECONOMY 3

02. GLOBAL COMMERCIAL PROPERTY INVESTMENT TRENDS 6

03. OUTLOOK 8

04. SUMMARY 10


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Economies across the globe are feeling the detrimental impact of COVID-19. A growing number of countries are in ‘lockdown mode’, meaning bars, restaurants and all non-essential shops are closed, with only a very limited number of high street businesses still operating. Companies in the leisure, retail and tourism sectors are among those businesses that are suffering the most.

Companies are laying off staff and are, in a number of cases, seeking government bailouts. In the US, the number of people filing for unemployment benefits reached 3.3 million in the week ending 21 March and a new record high of 6.6 million in the week ending 28 March. The previous record was 695,000 in 1982.

In the UK, close to one million people applied for universal credit benefits in the past fortnight, roughly ten times the usual figure.

Central banks have slashed interest rates worldwide and governments have introduced stimulus plans that are well in excess of the measures seen during the GFC in order to cushion the economic impact. Nonetheless, a global recession this year appears inevitable, with even the economies of Australia and China, both of which avoided a contraction during the GFC, expected to shrink significantly for the first time in decades.

Table 1: Global bank rates, selected countries/regions

Country Current rate Last move Date of last move

Japan -0.100 % 01/02/2020

Europe 0.000 % 10/03/2016

Great Britain 0.100 % 19/03/2020

United States 0.250 % 15/03/2020

Australia 0.250 % 19/03/2020

Canada 0.250 % 27/03/2020

China 4.050 % 20/02/2020

01. THE GLOBAL ECONOMY


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The negative impact on global GDP is expected to be more severe than during the GFC, with PMIs falling to record lows in the eurozone, the UK and the US. However, current forecasts suggest that the recovery will be both quicker and steeper. There has also been a glimmer of hope in the latest China Manufacturing PMI data, which, after falling to a record low in February, stabilised in March.

Chart 2 shows the GDP trajectory during both the GFC and outbreak of COVID-19. The period t0 indicates the quarter before the first significant decline in GDP and is indexed to 100. Current forecasts from Oxford Economics suggest that global GDP will have contracted by 1.8% q/q in Q1, followed by a 0.3% q/q decline in Q2. Thereafter the global economy is forecast to grow by 1.5% q/q

in Q3 and 1.8% q/q in Q4, respectively, making the recovery considerably stronger than that following the GFC. According to these forecasts, the global economy will be back at its pre-COVID-19 level by Q4 2020. The figures point to a painful, although short-lived recession.

Travel restrictions and border closures do not only make it difficult for travellers to return home, they also limit international trade volumes. Around 45% - 50% of air cargo is typically transported in the belly holds of passenger planes1, with some airlines now operating “ghost flights” with no passengers in order to keep the movement of freight going. Real time data from FlightRadar24 suggests that the number of daily flights has halved since the start of the year and the International Air Transport

Chart 1: Global GDP, q/q % change

Source: Oxford Economics

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.02005 Q1 2010 Q1 2020 Q1 2025 Q12015 Q1

forecast

01. THE GLOBAL ECONOMY

1https://www.forbes.com/sites/cathybuyck/2020/03/26/airlines-spot-revenue-opportunity-and-use-their-passenger-aircraft-to-ship-urgent-cargo/#3bfbb5017c68


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Source: Oxford Economics, Colliers International

Chart 2: GDP growth during GFC and COVID-19 compared

Association (IATA) expects a $252 billion decline in revenues in 2020 with around 2 million flights cancelled. On top of that, the association expects the cost of ticket refunds to amount to an additional $35 billion2. It is unclear for how long travel restrictions will remain in place and some countries could try to become less reliant on imports of certain goods and services. As Capital Economics put it in a recent note, it is possible that “globalisation has peaked”.3

Financial markets remain volatile, with many stock markets falling by 30% since the beginning of the year and recording their worst quarter since the GFC in Q1. Encouragingly, stock markets have recovered somewhat as some degree of investor confidence returned on the back of immense aid packages by governments to support their economies. However, markets remain volatile and

could, and most likely will, swing in either direction in the coming weeks.

The oil price keeps falling, with a barrel trading at around $20 (31 May), the lowest level in nearly two decades. The drop in the oil price stems from a combination of falling demand as a result of COVID-19 and a price war between Russia and Saudi Arabia. As is often the case in terms of global market volatility, investors have shown a renewed interest in gold, with one ounce temporarily trading at $1,700 – the highest level since 2012. Interestingly, prices for other commodities have surged, with orange juice futures up 17% and rice futures up 9% since the start of 2020. (Gold: +9%, Oil: -67%).4

108COVID-19 FGFC

106

104

102

98

96

94

92

100

t0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10

2https://www.iata.org/en/iata-repository/publications/economic-reports/covid-19-cash-burn-analysis/3Neil Shearing, Capital Economics, The chief economist’s note. 23 March 20204Correct as at 30 March 2020


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02. GLOBAL COMMERCIAL PROPERTY INVESTMENT TRENDS

Global annual investment volumes5 into commercial property have generally been on an upward trajectory since the GFC, reaching a record $1.8 trillion in 2018 before moderating slightly to $1.7 trillion in 2019. This is almost twice the 2011 figure of $0.9 trillion.

However, there has been a substantial slowdown in transactional activity in 2020 so far. Preliminary data for March indicates a decline of around 70% y/y in global activity, with volumes standing at just $48 billion, down from $144 billion in March 2019. The Q1 figure of $250 billion is the weakest since Q2 2012, with volumes down by a third from a year

earlier and around 40% below the 5-year quarterly average. Australia, China, Hong Kong and Singapore recorded particularly weak quarters.

Unsurprisingly, transactional activity in China came to almost a complete standstill, with monthly volumes falling from $31 billion in January to $27 billion in February and to just $2 billion in March. This compares to a 2019 monthly average of $54 billion. Wuhan, which was under complete lockdown for two months has recorded only 5 transactions so far this year. In 2019, the region saw 185 transactions.

Chart 3: Volume of investment transactions. Q1 20 vs 5-year average and Q1 19

Spai

n

Italy

Uni

ted

Stat

es

Sing

apor

e

-80%

-100%

60%

-60%

40%

-40%

20%

-20%

0%

Q1 20 vs Q1 19 Q1 20 vs 5-year average

Uni

ted

King

dom

Aust

ralia

Cana

da

Chin

a

Fran

ce

Germ

any

Hon

g Ko

ng,

SAR,

Chi

na

46% 43%

-16% -22% -18%-6%

Glob

al

35%

13% 9%

-2% -6%

-26%-34%

-53%-64%

-83%

-13% -20%

-40%

-59%

-41%-52% -47%

-80%

Source: Real Capital Analytics, Colliers International

5The analysis is based on data from Real Capital Analytics and includes both closed and pending sales. The data is correct as at 6 April.


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Chart 4: Monthly investment volumes, China, in $ billion

Although investment volumes were down in most countries when compared to the five-year quarterly average, activity held up reasonably well in a number of countries when compared to Q1 2019. Activity in the US reached $133 billion, little-changed from the $116 billion transacted a year ago, while the UK recorded a 9% increase from $16.9 billion to $18.4 billion over the same period. Of course, this figure was boosted by the UK’s largest ever recorded sale of the iQ student portfolio for $6 billion.

Q1 activity was particularly strong in Germany (+35% y/y), Italy (+43% y/y) and Spain (+46% y/y).

Looking at the number, rather than the volume, of transactions reveals that 9,371 investment transactions were recorded globally in Q1, down from 14,503 a year ago and the lowest figure since 2011. Numbers were below five-year quarterly averages across all major markets, led by Australia (-68%), China (-66%) and Italy (-60%).

01/2017 07/2017 01/2019 07/2019 01/202001/2018 07/2018

120

100

80

40

20

0

60

12-month moving average Monthly volume

Source: Real Capital Analytics, Colliers International


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03. OUTLOOK

Predicting the short-term trajectory of commercial property transaction volumes seems like an impossible task given the rapidly changing situation and lack of historical data. And although British Prime Minister Boris Johnson declared that “things will get worse before they get better”, we should be cautiously optimistic about the outlook for both the global economy and commercial property. There are a number of reasons for that:

1. Governments and central banks have reacted much quicker and on a much larger scale in order to cushion the negative impact on the economy than they did during the GFC.

2. The global weight of capital is much larger than it was a decade ago, and investors will continue to diversify their portfolios.

3. The initial hit to the economy will be more severe than during the GFC, but based on current forecasts, the recession will be much shorter and the recovery much steeper.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

2,000

1,800

800

600

400

200

0

1,600

1,400

1,200

1,000

700

600

500

300

400

200

100

0

4-quarter rolling sum (RHS) Volumes in $ billion (LHS)

forecast

Chart 5: Global quarterly investment volumes, in $ billion

Source: Colliers International, Dow Jones, Oxford Economics, Real Capital Analytics


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A simple economic modelling exercise based on the historical relationship between global GDP, stock market performance as measured by the Dow Jones and investment volume data supports point 3. As described above, global investment volumes weakened significantly in Q1 2020 and it is very likely that they will continue to be subdued in Q2. However, given the expected v-shaped economic recovery, volumes should pick up considerably in the second half of 2020.

Our econometric model6 suggests that Q2 global investment volumes will be at a level similar to the weak Q1 figures. Although activity has returned in

China, many parts of the world are in lockdown and business activity will therefore remain subdued in the coming weeks. However, the model predicts a considerable pick-up in Q3 and Q4, with global volumes returning to levels seen before the outbreak of COVID-19.

Of course, these predictions are based on the current forecasts of a strong economic recovery in H2 and should therefore be viewed with caution. The econometric model is far from perfect, but it provides a basic guideline of what the recovery in global commercial property investment volumes could look like.

6We used a simple regression model, covering the period from Q1 2008 until Q1 2020. The number of observations was 48. The model has an adjusted r-squared of 0.66 with both independent variables significant. The p-values are 0.11 and 0.00.


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04. Summary

• The global economy is expected to contract in Q1 and Q2 2020, the first recession since the GFC in 2008/09

• Financial markets are volatile, with many stock markets recording their worst quarter since the GFC during Q1

• Central banks and governments around the globe are implementing large stimulus programmes to cushion the negative impact on economies

• Current forecasts suggest that while the initial shock to the global economy will be more severe than during the GFC, the recession will be short and the recovery stronger

• Global commercial property investment volumes have slowed significantly in Q1 and will remain subdued in Q2

• However, under current forecasts, a strong recovery is expected in the second half of 2020

All information, analysis and recommendations made for clients by Colliers International are made in good faith and represent Colliers International’s professional judgement on the basis of information obtained from the client and elsewhere during the course of the assignment. However, since the achievement of recommendations, forecasts and valuations depends on factors outside Colliers International’s control, no statement made by Colliers International may be deemed in any circumstances to be a representation, undertaking or warranty, and Colliers International cannot accept any liability should such statements prove to be inaccurate or based on incorrect premises. In particular, and without limiting the generality of the foregoing, any projections, financial and otherwise, in this report are intended only to illustrate particular points of argument and do not constitute forecasts of actual performance.

Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP (a limited liability partnership registered in England and Wales with registered number OC385143) and its subsidiary companies, the full list of which can be found on www.colliers.com/ukdisclaimer. Our registered office is at 50 George Street, London W1U 7GA.

This publication is the copyrighted property of Colliers International and/or its licensor(s). © 2020. All rights reserved.

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Walter Boettcher Head of Research and EconomicsResearch & Forecasting+44 7824 691586 [email protected]

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covid-19...table 1: global bank rates, selected countries/regions country current rate last move...

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