The discovery of a new strain of Covid-19 in southern Africa has sent markets into a tail spin. The new Omicron variant was quickly declared by the World Health Organization (WHO) as a “variant of concern”, given a high number of mutations that suggest it could be both more transmissible and more harmful than previous variants, while also potentially rendering existing vaccines less effective.

At the time of writing, global equities were down by 3 per cent, listed real estate was down 4 per cent, US treasury yields have shed 20 basis points (bps), and the price of oil is more than 14 per cent below recent highs. The reaction has been more extreme than following the emergence of the Delta variant – a function of the potential severity of the variant (Delta was original designated as a mere “variant of interest” by the WHO), as well as the underlying policy context, coming at the beginning of a tightening cycle.

The economic impact will be driven by two factors: policy and fear. The latter will be more important in determining the level of retrenchment in activity, given that households and businesses are now much better prepared for another lockdown. But there is good reason to believe the impact will be limited. We are now accustomed to living with the virus, and the response from governments – to protect workers and/or support the temporary unemployed during the peak of the crisis last year –  potentially creates a moral hazard that could limit the type of precautionary behaviour typically associated with periods of heightened uncertainty.

However policy still has a role to play – both through the implementation of physical limitations on commerce, such as those on travel, tourism and leisure, as well as through macroeconomic policy. The job of central bankers is made harder as Omicron further complicates the narrative on inflation – potentially intensifying some of the ‘transitory’ drivers of price increases – although if anything, we’re likely to see a more accommodative stance on monetary policy, and this is partly reflected in recent yield movements. Policy and fear are not mutually exclusive either – the severity of public health restrictions can influence fear, which subsequently determines the scale of the response from policymakers.

Real estate is not immune to either policy or fear. We are all well versed on the implications of a further lockdown on the retail and hospitality sectors, or a return to working from home for office space. A potential collapse in international travel will also hit cross border activity, while a decline in sentiment could make December transactional activity a little more subdued. But perhaps more importantly, Omicron serves as a stark reminder that we are no closer to beating the virus. And this will reinforce some of the structural trends impacting demand across core real estate assets.

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Contact Oliver Salmon