Bloomberg estimates that 40 million workers have been furloughed across Europe’s largest six economies – Germany, UK, France, Italy, Spain and the Netherlands – following Covid-19’s outbreak.

However, temporary job subsidies are unlikely to prevent increases in unemployment rates after Europe’s furlough schemes are wound up towards the end of 2020. Eurozone (EZ) unemployment is expected to peak at around 12 per cent by year end, up from the current level of 7.3 per cent.

Each country’s true resilience will become more apparent once economies are able to function more organically and one positive is we expect residential development to focus more towards affordable housing to cater for lower incomes.

Furthermore, we anticipate that pan-European investors will look to gateway cities with young, agile workforces to recover most quickly from the downturn.

The European Central Bank’s (ECB) main refinancing rate remains at zero, leaving no further room to lower rates, providing investors with cheap debt (although lending to real estate has become more stretched since Covid-19’s outbreak). Southern European economies with higher levels of debt will find servicing existing debt eats into government spending plans unless central aid can be offered.

The ECB must also avoid fears of a deflationary spiral. EZ inflation is expected to have fallen to 0.1 per cent during May 2020, the lowest rate since 2016 due to falling energy demand. The ECB intends to stimulate demand using the Pandemic Emergency Purchase Programme (PEPP), recently increased from €750 billion to €1.35 trillion, to return back to the 2 per cent inflation target, which equity markets welcomed. Landlords may begin to offer more inflation-linked leases to ensure real rental growth over the medium term.

Meanwhile, the European Commission’s planned €750 billion recovery fund is intended to help some of the worst-hit and heavily indebted European economies bounce back from the imminent economic downturn.

Germany’s temporary VAT cut from 19 per cent to 16 per cent will also help to stimulate consumer demand for the remainder of 2020. The larger European economies will be able to stomach the additional debt burden more easily in the short term.

Yet, focus will be on whether this has a positive impact on the marginal propensity to consume, or will simply increase household savings ratios, which could add upward pressure to retail vacancy rates. When business activity stabilises in the longer term, governments may opt to increase corporate taxes, which could impact multinational occupiers’ decision making and office take-up.

It is likely that planned infrastructure spending will be put on hold in the short to medium term to service markedly increased debt repayment costs.

Countries which have been least affected by Covid-19 will ultimately have more capital to invest in expansionary infrastructure schemes including green energy initiatives and urban cycle routes which have come to the forefront during lockdown periods.

However, green policies will remain on the agenda. Germany has announced increased incentives for buying electric vehicles, a welcome boost for the automotive sector which will stabilise logistics demand levels both nationally and throughout neighbouring countries.

Further information

Read more: Covid-19: Impact on European Real Estate - Vol 5