The resilience of residential real estate in a Covid-19 world
The Covid-19 pandemic is likely to have a relatively limited effect on residential rents. The global economic recession has led to massive job losses and record rates of unemployment. However, rent collections in private rented residential remain high and lower turnover rates are benefiting stabilized properties. Rents will likely remain flat or decline marginally in the near term, but rebounding labor markets will support renewed leasing.
While we expect a decline in pricing, values are likely to remain relatively stable. Investment activity has slowed and tighter lending standards should lead to a price correction. However, investor sentiment surveys indicate that the residential sector will become even more important for institutional investors who are looking for relatively stable cash flows and returns. In fact, yields have fallen further for certain multifamily transactions that closed during the pandemic.
Risks in certain residential segments and markets
The affordable living segment has held up well thus far in the crisis. The sector benefits from stable demand, while subsidies have continued to buoy income potential. Nevertheless, there are potential headwinds in countries with more significant job losses and weaker social systems. For instance, rent collections are reportedly weaker among lower-quality Class B/C properties in North America. Near-term income prospects may continue to be constrained in the region as certain benefits expire. At the same time, stronger social systems and lower unemployment levels will support the sector in Europe. So far, rent arrears here are negligible for institutional-grade assets.
Supply will be a concern for urban high-rise assets. Construction activity continued in many markets, even at the height of lockdown measures. Most that were on hold have now advanced with approximate delays of one-to-two months. Multifamily development activity has remained at moderate levels and many large cities are facing housing shortages. However, construction has been concentrated in luxury high- and mid-rise assets in urban locations, despite a rise in rental concessions. More development could further weigh on effective rents in these assets if leasing activity remains more subdued. Furthermore, the Covid-19 pandemic has had a larger impact on major metropolitan areas. This might result in some urban restructuring or suburbanization, especially for mega cities.
Student living will remain the most vulnerable residential sector to the negative effects of the Covid-19 pandemic. The impact on rents has been limited for certain operators because of long-term leases. That said, many operators were under pressure to offer rent relief during the previous term. The disruption is likely to persist over the next year as pre-letting for the autumn term is at low levels. Many universities are continuing with e-learning or reduced courses. While demand should rebound, international student enrollment is likely to remain depressed, given travel restrictions and exposure concerns. This will restrain the demand for upscale communities that appeal to higher-income foreign students. The financial viability of colleges and universities will also be a short- and long-term concern, given the economic downturn and the structural decline in demand for tertiary education.
Senior living will also face near-term headwinds. Heightened restrictions and concerns over infection have limited new leasing activity, with the largest impact on care homes. Leasing has started to recover, but increased costs related to personal protective equipment, labor, and other containment measures, will continue to hinder performance.
Outlook for the residential sector
Economic conditions are beginning to improve as containment measures are lifted, but the recovery is expected to be drawn out. A weaker economic environment is supportive of the renting model as fewer prospective home buyers are able to secure initial payments and qualify for financing. Household debt and a lack of affordable stock remain a long-term hindrance to home ownership. This trend supports demand for the rental housing market, along with a changing preference for more flexible housing options. Student housing that is tied to larger, established and state-funded educational institutions should remain a favorable investment. In addition, ageing demographic trends will remain a long-term tailwind for senior living demand.
There is likely to be an increased preference for more spacious housing units in well-connected suburban locations versus small inner-city apartments. In the near term, dense urban nodes with a dependence on public transportation may fall out of favor because of Covid-19 concerns. Tenants may look to more affordable, sparsely populated locations with better personal vehicle accessibility. This trend is likely to accelerate given increased remote working as more employees seek home office spaces – particularly if the pandemic is prolonged and flexible work arrangements become permanent. An increased preference for outlying areas could – if infrastructure is supportive of this – lead to less pressure on urban core locations. This would weaken the rental environment and give more limited income growth potential. It may also support demand for certain alternative sectors in select regions, including single-family housing rentals and manufactured housing.
There is likely to be an increased preference for more spacious housing units in well-connected suburban locations versus small inner-city apartments
Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.