Capital Economics: 45% fall in US investment activity is base case for 2020

Capital Economics said in a note yesterday that its base scenario is for particularly weak US deal volumes in Q2 and Q3, before a decent recovery in Q4.

Kiran Raichura, senior property economist, at Capital Economics explains:

“From a historical perspective, this would be a sharper fall than either of those caused by the 2001 terror attacks or the GFC, although it would be much shorter than the latter.

“Recent equity and bond market shifts highlight the sharp rise in risk aversion, which will also lead to caution amongst real estate investors. This will reduce investors’ willingness to transact, as well as the amount prospective buyers are willing to pay for a given asset, potentially leaving buyers and sellers far apart on valuations, especially in the absence of forced sales. There are also signs that lenders are stepping back from the market.”

“In our base case, there is a deep, but short-lived hit to the economy. The likely double-digit annualised fall in economic output has led us to pencil in an unprecedented fall in investment activity in Q2 and only a small improvement in Q3 as it takes time for the sector to get back up to speed from a very low start position. However, we have then assumed a resurgent Q4, in which a number of deals are pushed through by year-end, with a reversion to “normal” roughly by Q1 2021. In fact, in this scenario, there could be an upside to activity in 2021 as capital flows back into US real estate.

“This would still be a far sharper fall than either of the two other downturns, but the reduction in investment activity would look tiny in contrast to the GFC, where activity levels only began to pick up three years later. However, one could also envisage a nastier state of the world, in which social distancing is in place for longer and the economic effects are prolonged. In such a scenario, investment could remain weak well into 2021.  This would result in investment falling 70% below its peak, although it’s worth noting that this will still be a far shorter downturn than 2008-10.”