China’s so-called zero-Covid policy — and continued lockdowns in major cities, including Shanghai — could slice between 2% and 6% off real estate returns both globally and in the U.S.

New stress-test research from MSCI shows property is at risk of a measurable hit under various scenarios.

MSCI’s stress test assumed one scenario of economic decoupling of China and the West and a Chinese growth slowdown. It balanced this against projections for new and sustainable growth.

For a diversified portfolio consisting of global equities and U.S. bonds and real estate, the impact ranged from a drop of 9% to an increase of 6% for the “decoupling and growth concerns” and “new and sustainable growth” scenarios, respectively, while the “Continuing COVID lockdowns” scenario registered a 4% decrease on returns.

In what MSCI described as its “most dire scenario”, which assumes economic decoupling and a growth slowdown, a diversified portfolio of global equities and U.S. bonds and real estate could lose 9%.

For real estate in particular, the MSCI Global Property Index showed a 6.55% fall for decoupling and 2.5% fall for continuing lockdowns. The figures were almost identical for the MSCI U.S. Annual Property Index. Both showed a rise of 3.2% if the "new and sustainable growth” scenario played out.

“Given China’s importance in the global supply chain, investors may wish to look out for potential spill-over effects to the global economy and another source of upward pressure on inflation,” MSCI Research Senior Associate Daniel Szabo  and Executive Director Thomas Verbraken said.

“The recent Covid-19 lockdowns in China and their impact on global supply chains add another concern for investors on top of China’s real estate debt crisis and regulatory changes and the potential escalation from the Russia-Ukraine war and other geopolitical tensions that could fuel increased decoupling of China from the global economy," they concluded.