|The recent news of Omicron’s entry into the UK has brought interest back to the property market and sparked a vigorous debate regarding the effects it could have on the UK property market. With the new Omicron variant, the latest of many variants to wreak havoc on the world and its population since it first appeared in West Africa a few months ago, Covid-19 has once again been put in the spotlight. The new variant is being touted by some as potentially more virulent and deadly than ever before.|
Global stocks were down 3%, listed real estate was down 4%, US treasury yields were down 20 basis points (bps), and the price of oil was more than 14% below recent highs at the time of writing. The reaction has been more virulent than it was when the Delta variant first emerged, owing to the variant’s potential severity (Delta was originally recognised as a simple “variant of interest” by the WHO), as well as the underlying policy backdrop, which comes at the start of a tightening cycle. The initial response of markets was to push back some pricing. To ease tensions landlords are advised to find out how much your house is worth. The market has also pushed back some pricing in the money, equity and commodities markets during this period. As at close of play yesterday (Jan 24th), the S&P500 and Nikkei indices were down over 1 per cent, whereas oil has lost around 9 per cent of its value between Wednesday’s closing price and Friday’s open. On Dec 22nd, itself a volatile day, markets rallied on news that China had released a few more strategic reserves and made changes to its OMO in an attempt to support the Yuan.
Two things will determine the economic impact: policy and fear. Given that families and businesses are now far better prepared for another lockdown, the latter will be more essential in deciding the extent of activity retrenchment. However, there is reason to anticipate that the impact will be minimal. We’ve grown accustomed to living with the virus, and governments’ response – to protect workers and/or assist the temporarily unemployed at the height of the crisis last year – could create a moral hazard, limiting the type of precautionary behaviour typically associated with times of heightened uncertainty.
However, policy still has a role to play, both in terms of physical restrictions on trade, such as those imposed on travel, tourism, and leisure, and in terms of macroeconomic policy. The job of central bankers is made more difficult by Omicron, which further complicates the inflation narrative by potentially amplifying some of the ‘transitory’ drivers of price increases. However, we’re likely to see a more accommodative stance on monetary policy, as evidenced by recent yield movements. Fear and policy are not mutually incompatible though; the severity of public health limitations can influence fear, which in turn influences the scope of policymakers’ response.
Neither policy nor fear are unaffected by real estate. We’re all aware of the ramifications of increased restrictions on the retail and hotel industries, as well as a return to working from home as an alternative to traditional office space. Cross-border activity could be harmed by a likely drop in international travel, while a drop in attitude could make December transactional activity a little more subdued. But, perhaps more importantly, Omicron serves as a sobering reminder that we are still no closer to eradicating the virus. This will amplify some of the underlying trends that are influencing demand for core real estate assets.
We believe that despite the levels of supply coming to market, prospects for capital growth are not compromised. Our transactional activity slowed in September and was also subdued in October as we experienced a minor pullback from buyers. This is at odds with June’s solid levels and means that momentum has slowed across the sector, which we put down to market uncertainty regarding what happens post-Brexit. The current climate reinforces some structural trends, such as a preference for the existing stock over new development.