In a recent conversation with real estate experts Knight Frank, we explored how Europe’s property markets are responding to the coronavirus pandemic, and what’s likely to happen when our lives begin to return to normal.

In March 2020 governments around the world ordered their citizens to stay indoors to prevent the spread of Covid-19. Since then, many of us have been able to appreciate that our homes have not just a financial value but an emotional one too. They’ve provided a roof over our heads during the crisis, reunited our families and given us a way to rediscover our communities more keenly than before.

There’s still a lot we don’t know about the virus, which continues to take its toll on lives and the global economy. Faced with an uncertain outlook, we examined previous downturns to see if they offer any clues about how property markets are likely to react. We also look forward to better days ahead and how the sector is adapting.

Over the long term, our homes are a safe store of value – and while the property market is not immune to downturns in the economy, over the long-term the property market remains a steady performer. The deep UK recession in 1991–92 saw inflation surge to almost 10% and interest rates rise to 15%. As the economy contracted and unemployment rose, house prices fell across the country. The property market suffered another substantial drop during the recession caused by the 2008 financial crisis.

However, over the past 30 years, property values in prime central London have been driven by demand, dominated by international buyers, who have been able to respond rapidly to the evolving environment. Prices have also largely been driven by changes in government policy, including increases in stamp duty for investment properties (figure 1).

Figure 1: The politics of housing

Government policy has driven sales volumes in the UK housing market over the past decade.
Source: Knight Frank and Macrobond. Date: April 2020
The chart shows that government policy has driven sales volumes in the UK housing market over the past decade. The data from 2007 through to today shows how the sales volumes react when new policy is announced.

French property prices also saw dips in 1991–92 followed by a slow recovery over six years, and again in the 2008 financial crisis but with a swifter recovery. The British second-home buyer saw their purchasing power reduced after the crisis, dampening volatility in those markets.

By contrast, Swiss property prices held steady during this period. The reason is largely because the Swiss franc is a currency of choice in times of stress and the Swiss property market was heavily dominated by domestic buyers (figure 2).

More recently, the economic cycle is still a strong factor in price movements, but government policy has played an increasingly prominent role in property values.

Figure 2: Flight to safety

Switzerland’s property market tends to perform well during challenging times.
Source: Wuest Partner. Date: April 2020
A chart showing Geneva Prime (+1.9%), Zurich Prime (+6.7%) and Swiss average (+2.7%) price growth since 2000. The Swiss average price growth has slowly and consistently been climbing since 2000.
Increased capital rules were introduced by the Swiss National Bank from late 2013, followed by stricter lending rules in 2014. When the central bank unpegged the franc from the euro in 2015, prime Geneva and Zurich house prices fell. The market bottomed in 2016 despite transaction levels in the prime Geneva market rising in the same period.

Government policy depressed the French market following the election of President François Hollande in 2012, owing to his sharp increase in the tax regime. The policy was soon abandoned, but confidence only really returned after the election of Emmanuel Macron in 2017, whose policies are focused on placing France centre stage in Europe (figure 3). Vast infrastructure programmes are under way in France, with the reversal of some of Hollande’s tax regimes and the introduction of labour reforms creating a pro-investment stance and attracting business.

Figure 3: Taxing measures

The performance of France’s property market shows the importance of a business-friendly government.
Source: Knight Frank. Date: April 2020
This chart shows how the French property market has responded positively to business-friendly government measures. The number of searches for buying in France goes up significantly each time new business-friendly tax measures are announced.

As a result of central bank monetary policy, mortgage interest rates have also hit record lows, providing additional support to house prices, particularly in France and Switzerland, with the impact in the U.K. being more subdued. Low interest rates appear to have only prevented prices in prime central London from dropping further, and the decrease has mainly been driven by government policy. There have been nine changes to stamp duty since 2008 and another one is due in April 2021. In addition, mortgage lending restrictions were introduced in 2014–16 and uncertainty caused by Brexit has rippled into the property market.

Recently, the performance of real estate in prime central London has decoupled from the rest of the country, as well as the underlying economy. Prices peaked at the end of 2014 and early 2015, and have since declined steadily even though GDP has expanded and unemployment fallen.

Looking forward

Social distancing measures have slowed property transactions across the globe to a trickle. Levels are anticipated to be 40% to 50% lower than 2019, but this trend is expected to reverse fairly quickly, especially with the introduction of unprecedented government stimulus. In the short term, prices in prime locations such as London, Paris and Geneva are expected to see only modest falls in value, ranging from 0% to 5% (figure 4).

Figure 4: 2020 forecast (annual % change)

Knight Frank has put 20 cities into four price bands to show how Covid-19 is likely to shape the future of global prime residential markets, with none expected to grow by more than 5%.
This chart shows which markets prime residential markets are expected to drop or grow following Knight Frank research. None are expected to grow by more than 5%.

Depending on how their governments responded to the pandemic, some countries look more attractive than others. For example, Portugal restricted travel to second homes, while France didn’t. With the pro-investment backdrop in France and 90% of buyers and sellers looking to restart their house moves, the environment should support prices over the medium term.

Ahead of COVID-19 there was increased activity in the South of France. Enquiries from Belgian, Swiss and German buyers have been noted, as well as Asia-based expats looking for a holiday home in the region.

Prices in prime central London have already been under pressure for the past five years due to the government policy changes described above. Arguably there is less of a buffer for prices to fall when the lockdown is lifted and other restrictions loosened. Although international travel restrictions are likely to dampen activity in the near term, prices are expected to rise by 20% over a five-year period.

The Swiss market has benefited from a flight to safety during previous economic downturns, which may explain the recent increase in the number of potential buyers enquiring about property in Geneva. The country offers a secure economy for investors and a safe environment for families, while the strength of the Swiss franc continues to play a part.

Over the long term, real estate has outperformed almost all other asset classes, and delivered returns that are much less volatile than the stock market. This trend is expected to continue, as home buyers and investors ensure their asset allocation is diversified (figure 5).

Figure 5: The long-term case for stocks over core bonds is ever growing

2020 long-term capital assumptions for expected returns over the next 10 to 15 years

Source: 2020 Long-term Capital Market Assumptions, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management. Returns are nominal and in GBP.


Chart showing how real estate has outperformed almost all other asset classes over the long-term and this trend is expected to continue for the next 1-15 years

Cornerstones of value – such as excellent education systems, connectivity, transport hubs and stable governments – should continue to underpin value in prime locations, such as those in France, Switzerland and the UK.

Investment will be another key driver of value over the longer term. The Grand Paris Project, a $26 billion investment in transport networks in and around Paris, as well as the 2024 Olympics, are expected to support property prices in the city.

Similarly, investment in infrastructure in mountain resorts, particularly in Switzerland, has led to outperformance over the past few years and is expected to continue.

Changing landscape

Like many other areas of the economy, the property market is adapting to the lockdown. There’s already been an acceleration of the trend to streamline the way we buy, sell and advise on transactions by adopting new technologies. The latest software enables potential buyers to take virtual tours – even using drones – while vendors are being encouraged to take photos and videos of their properties.

Over the longer term, the way we use property is likely to change as a result of the pandemic. With air travel unlikely to be back to normal until 2021, homes that are easy to reach by road or rail look more attractive. European cities with lots of parks and open spaces, as well as those that offer quick access to the countryside, have particular appeal.

The lockdown has encouraged many of us to reassess our priorities. Families that have come together under one roof have rediscovered how important it is to have a safe place to sit out the pandemic. There’s already been increased interest in properties in rural areas with more outside space, which provide the perfect escape for large families.

In the commercial space, there are questions about the future of the office now that so many of us are working from home. Sustainable investing is also likely to be an increasingly popular theme as businesses look to rent or buy the most environmentally friendly buildings they can find.

The size and shape of the commercial real estate market continues to change. The transition away from the three traditional sectors of office, retail and industrial to alternative properties is likely to gather pace. This shift is creating many other opportunities for investors – from warehouses for online sellers to student accommodation and a wide range of buildings for the healthcare sector.

Global capital flows into residential and commercial property have been significant over the past four to five years. However, in the short term, travel restrictions are likely to encourage investors to look for opportunities in their domestic markets rather than overseas. Those with cash ready to deploy will be in the best position to react quickly as opportunities arise.

Seek specialised advice

Real estate offers a sense of comfort when looking to preserve and grow wealth. Whether buying a second home, an investment property or giving your children a head start in life, there’s a lot to think about – particularly when you haven’t grown up in the country where you are purchasing. Every jurisdiction has its own regulations and taxes, depending on how you intend to use the property and eventually either sell or pass it on.

It’s important to consider your financial goals and explore the various options with your professional advisers so you can structure any purchase in the best possible way. At J.P. Morgan, we’re finding solutions to help you navigate today’s challenging environment, ensuring you are driving efficiency from both sides of your balance sheet as well as taking advantage of low interest rates as we have the capability to finance high-value residential real estate in certain jurisdictions.

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