The Impact of COVID-19 on UK Property

COVID-19 IMPACT ON UK REAL ESTATE

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COVID-19 Impact on UK Real Estate

Introduction

COVID-19 has left an enormous scar on the modern society due to its toll on the society and the economy. It can be considered one of the most devastating pandemics in recent times. Since its emergence and rapid spread globally, COVID-19 has been extensively studied to determine the true extent of its consequences. However, the initial studies were concerned with pathophysiology and interventions. Today, thousands of studies conducted on the pandemic focus on a wide range of contexts. From an economic perspective, the impacts on and responses by markets and industries have dominated the literature. Different sectors, industries, and countries suffered differently due to the pandemic. Such differences can be attributed to the government policies and measures implemented by the public health sector. Even so, it can be observed that most industries were dealt a devastating blow.

The real estate industry suffered significantly, majorly due to government restrictions. A sharp shift in demand and supply was witnessed in many countries. The short-term effects differed from the long-term ones, considering that the market experienced some self-correction mechanisms. The focus of this literature review is to explore the effects of COVID-19 on the demand and supply in the UK real estate market. A brief overview of COVID-19 is presented, followed by an overview of the current studies on the subject. The effects will be categorized into three: residential, commercial, and office. The literature review will explore the immediate and long-term effects.

Overview of COVID-19

COVID-19 broke out in December 2019 as a form of pneumonia of unknown origin, first reported in Wuhan in China’s Hubei province. Initially, it was perceived as just another pneumonia outbreak epidemiologically linked to the Huanan Seafood Wholesale Market. However, samples tested indicated that the outbreak was a novel coronavirus related to SARS-CoV. Its global spread caused thousands of deaths, leading the World Health Organization (WHO) to declare a pandemic on March 12, 2020 (Ciotti et al., 2020). In a very short time, the world had paid a high toll in terms of economic repercussions, human lives lost, and an increase in the levels of poverty globally. COVID-19 was unique in many ways. First, it is considered a “once-in-a-century pathogen” since its fatality risks were more than 1%, which is higher than the average influenza (Padhan and Prabheesh, 2021). However, it is essential to note that the fatality rates differed across regions and changed with time. Some studies indicate that the rates ranged between 1.7% and 39% (Horita and Fukumoto, 2023). Second, COVID-19 could kill even the healthy and elderly individuals.

The unique characteristics of the pandemic made its spread almost unstoppable. The virus can survive on different surfaces for a long time. For example, it could survive on plastic for 72 hours, cardboard for 24 hours, stainless steel for 48 hours, and copper surfaces for 4 hours. The transmission occurred through physical contact with an infected person or surface. There was no herd immunity, which made the spread unstoppable. Therefore, only critical measures could help reduce the rate of spread. With estimates indicating a possibility of 40% to 70% becoming infested, immediate measures had to be taken. WHO recommended frequent hand washing with hand rub, soap, or alcohol and water, practicing respiratory hygiene, and avoiding touching the nose, eyes, and mouth (Khanna et al., 2020). Face masks, even though controversial, were also recommended.

However, most of the economic effects of the pandemic resulted from the strict measures that the governments made to prevent further spread of the pandemic. Most notably, national lockdowns in almost all countries resulted in economic activity being halted domestically and internationally. In other words, entire economies were shut down alongside all aspects of daily life (Onyeaka et al., 2021). Understandably, the lockdowns were initiated to prevent further spread of the pandemic. The rationale was that people could move from an infected region to a safe region and introduce the virus there. Even within countries, moving from urban to rural areas could result in the virus being introduced in an area it had not reached. In essence, the lockdown was mostly a containment measure. The lockdowns were initiated on two fronts: domestic and international. Domestic lockdowns sought to restrict the movement of people to curtail daily interactions between them. International lockdowns locked national borders, restricting the movement of people and goods between countries. On both fronts, economic activity was massively hampered, resulting in businesses closing down and people losing jobs.

All industries, including real estate, faced challenges from COVID-19 due to both the pandemic's effects on people's socioeconomic well-being and the aftermath of the national and international lockdowns. Scholars established that the effects of the pandemic could be broadly classified into supply and demand effects (Padhan and Prabheesh, 2021). The supply effects emanated from the loss of working hours and the reduction in the aggregate demand and income due to the loss of employment resulting from the lockdowns. The direct effects of the pandemic included loss of employment, higher international transaction costs, a sharp reduction in demand for services that required proximity, and a decline in travel. Overall, it can be expected that shutting down the economy means shutting down production, thereby diminishing supply. At the same time, the demand for products and services also declined when people lost jobs and, hence, income. Even those who had disposable incomes had to reduce their consumption levels due to the uncertainties surrounding the lockdowns. Buyer-seller relations changed drastically, affecting the supply-demand equilibrium (Mandel and Veetil, 2020). Therefore, the lockdowns only compounded the economic detriments of the pandemic.

Governments realized the true extent of the economic detriments caused by the pandemic. Measures were put in place to reduce the detriments. For example, the UK initiated such policies as the Job Retention Scheme (commonly known as the ‘furlough’ scheme), where employers received 80% (capped at £2,500 per month) of the wages of employees who temporarily stopped working (Susskind and Vines, 2020). Such policies ensured that job losses did not stop incomes from flowing and that people who lost jobs could still cater to their basic needs. Besides the government initiatives, the markets also made critical corrective measures that ultimately steered the global economies toward stability. The most significant trend was the rapid digitization in business, which fast-tracked the development of e-commerce. Even with the lockdown, essential commodities had to be purchased and delivered to clients. The easiest way was to develop online shopping platforms for such commodities as groceries, sanitizers, masks, and other essential commodities (Galhotra and Dewan, 2020). It is not just the large e-commerce firms that got into this business. Even new start-ups emerged to plug the gap.

Before exploring the case of the UK’s real estate, it is crucial to assess whether or how the real estate industry responded to the initial shocks caused by the pandemic. The residential and industrial sectors were less affected by the crisis. A possible explanation is that even when people lost their jobs, they still managed to pay rent for their residential properties. Additionally, businesses shut down operations only temporarily, meaning the real estate for industrial markets remained virtually unaffected. In many cases, studies establish that landlords only began threatening services to tenants after they fell far behind with the rents. Additionally, smaller landlords were more likely than larger ones to