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Covid-19: The impact on the global rental market

Covid-19 has caused global demand for rental properties to plummet as the impact of the pandemic on business activity, personal living and economic growth continues to impede overseas assignments. The scale of the coronavirus and worldwide quarantine measures have led us into uncharted territory during a time in which businesses are as globally connected as they have ever been. Lockdown measures have prompted the repatriation of many assignees, while those remaining in their host locations face uncertainty in their current tenancy agreements. The future of new and planned assignments is ambiguous and mobility managers are now challenged in deciding when new tenancy agreements should be secured and signed, if at all. Although there is no clear picture for how the global rental market will recover from Covid-19, some insight can be gained by drawing on examples of how selected countries are currently adapting, as well as reviewing expert predictions for how these will impact the future of the market. 

Immediate effects

As more and more countries entered lockdown conditions, many governments issued advice to expatriates and foreign nationals to return to their home countries. Some even implemented urgent border restrictions for non-residents and flight cancellations, such as in Australia, which left many expatriates abroad struggling to return and prompted a number of these to abandon their properties. 

The lockdown process has also meant major restrictions on the normal estate agent and tenant processes, reducing the amount of rental transactions taking place. Many brokerages are shut and those still operating are doing so with the caveat of online property viewings rather than physical viewings. Renters in the United Kingdom have been instructed to delay moving while lockdown measures are in place, where possible. The compliance landscape is also tightening in some locations. For example, landlords in Miami have been operating increased background checks to avoid renting to prospective tenants that are unable to pay or claiming to be unable to pay.

The economic impact has already taken its toll in some locations as residents are no longer able to pay their rent. Rents in Hong Kong are reported to have fallen in high-end districts as residents either leave the country or have less job security. The effect has been seen at the lower end of the market too, as many young professionals have lost their jobs. 

Government interventions and landlord concessions

A range of interventions has been sanctioned by governments to mitigate the financial hardship faced by tenants and landlords and secure some short-term market stability. These have primarily been reported in Western economies, though newly announced policies are coming into force regularly. 

The most common of these interventions is emergency legislation to either ban tenancy terminations or require landlords to extend notice periods, often by three months. Varieties of this legislation have been introduced across the world. The Irish government enacted the Emergency Measures in the Public Interest (Covid-19) Act 2020 which introduced a blanket ban on both tenancy terminations and rent increases, even if either was served before the emergency period. Spain had a similar approach in banning evictions and rent hikes but announced a raft of other measures as well, such as extending all leases for six months while the state of emergency is in place. In Germany, tenants that can prove they have been financially affected between April 1st and June 30th cannot be evicted but will accrue debt on the missed payments. This debt has a repayment date of 30th June 2022 and is charged with an interest based on the legal interest rate of 9%. 

To alleviate the income loss from these interventions, some countries have introduced relief for landlords, such as mortgage holidays for buy-to-let landlords in the UK. Other options for landlords are limited to bankruptcy or providing rental concessions for tenants no longer able to pay, such as rent holidays or suspensions. Australia has recently announced a $440 million six-month support package to allow landlords and tenants to negotiate on rental payments when households have lost at least 25% of their income. Landlords in Sydney are even reported to be offering one month’s free rent to attract tenants, with data from realestate.com.au showing a 300% rise in vacant rental listings over the last month. 

Airbnb and the short-term market 

Recent years have witnessed the huge success of short-term rental platforms, such as Airbnb, which can disrupt markets by restricting the supply of properties available for longer leases. In Cyprus, annual rent increases of 14% and 13% were recorded in Limassol and Nicosia respectively in ECA’s March 2019 Accommodation survey, in part owing to the reduction of supply from long-term properties converted to the holiday market.

Covid-19 has caused this trend to be rapidly overturned. After Airbnb updated their policy to allow cancellations, bookings are down, and markets have become flooded as landlords struggle to fill their short-term properties. Data from AirDNA, an analytics company that tracks the number of bookings for Airbnb and similar platforms, saw new bookings in Australia down by over 75% in two months. In Spain, some properties were observed to be listed at almost 30% below the market rate. In many locations landlords are beginning to convert these properties into longer leases to stay afloat, such as in London, which previously had just under 50 000 properties listed on Airbnb. In the week beginning 16 March 2020, a leading UK property site saw a 45% year-on-year increase in new long-term rental listings in London, which can partly be attributed to these Airbnb-intended properties entering the market. Airbnb recently received a $1 billion private investment deal to weather the crisis and has said it will be shifting its focus to these mid-to-long-term stays, particularly student accommodation and extended short-term assignments. With this ambition of disrupting the market and rivalling platforms like Zoopla and Rightmove, it is likely that many of these newly converted properties will now remain as long-term listings.

Most international organisations have suspended all but essential business travel, meaning demand for serviced accommodation has also dried up. Many aparthotel and other serviced accommodation providers, such as Staycity, have removed all rooms from sale and offered a free cancellation policy. Though the situation remains under review at present, accommodation will be reopened once it is safe to do this. It remains to be seen whether demand will catch up to an extent that prices return to the same level as before the pandemic. 

Case study: SARS

While we are in unchartered waters given the global scale of the Covid-19 pandemic, there is some precedent to draw on from previous outbreaks. Although epidemics such as the Zika virus and Ebola still affected rental markets, Covid-19 is most comparable to the SARS outbreak as another coronavirus originating in China. The leasing market in Hong Kong after the SARS outbreak in 2002-2003, can offer some insight into how rental markets may respond after Covid-19. However, this must be considered within the context of today’s economy and Hong Kong’s position within it being vastly different than they were during the SARS period. 

Rents in Hong Kong were reported in ECA’s 2003 Accommodation Survey as decreasing by -15% from the previous year, due to a combination of the SARS virus and the effects of both a global economic downturn and the Iraq war. The market then quickly rebounded amid an economic upturn and increased trade with the Chinese mainland. Despite this, demand for sales remained low and unaffordable for many, making rentals extremely popular. We then observed rents in Hong Kong increase by 6% between 2003 and 2004, and 10-20% every year thereafter until 2009. This was due to the prosperous economy stimulating a rapid increase in population, resulting in insufficient supply as properties were quickly snapped up.

Market outlook

The sharp initial decline in the Hong Kong market quickly gave way to recovery and the consensus view among major real estate consultants and advisors is for much of the same this time around, with an economic rebound in the second half of 2020 expected. 

A recent report by JLL, a property broker with a global reach, highlights diminishing consumer confidence and reduced mobility brought on by the pandemic. However, the global outlook is positive, as leasing demand is typically resilient to economic shocks as home ownership tends to become less affordable for many. 

A briefing by another global broker, CBRE, echoes a similar sentiment of resilience in response to the British market and rents in the United Kingdom are reported to have remained generally stable amid the temporary shock. An increase in tenancy renewals has been observed as neither tenants nor landlords want to enter the market currently. Counteracting this, new tenancies have declined and terminations have been seen from international students and those on shorter leases. CBRE expects the peak of the economic downturn towards the end of June 2020 before a gradual recovery. There is less potential for rental growth since both tenant mobility and new letting enquiries have reduced and although prices have largely held at present, they may begin to soften depending on how long the market inactivity continues.

Other brokers are divided on how the UK market will respond to the pandemic. Knight Frank expects rental values in London to remain flat over 2020, with some upward pressure returning in the second half of the year. On the other hand, Savills predicts that, although many rental payments in the UK will continue as normal, the average rental price will fall as landlords help tenants in financial distress. Growth is predicted to remain minimal until income growth returns. 

Regarding the European market, Savills forecasts little change as tenant protective measures will continue to freeze the market. The reduction in construction activity will lead the supply and demand imbalance present in many European cities to persist. It is possible that due to the perceived risk of living near others, demand may shift from dense city areas to more spacious suburban areas. 

There has been little regional reporting on rental markets, though some experts in economies with typically thriving property markets are anticipating a swift change. Economists in Australia are predicting the first recession in 30 years and industry experts expect that the coronavirus outbreak will accelerate the recent downward pressure on rents, prompting further price depreciation. A similar situation is forecast by real estate brokers in Germany as the country prepares for a 5% drop in GDP and an end to its 10-year property boom. There are, however, reports of the market in China beginning to recover as broker services reopen and the pent-up demand from lockdown is slowly released. 

Summary

It is still too early to definitively assess the effect that coronavirus will have on global rental markets as it will depend on the duration of the pandemic and the timeline for when individual countries emerge from their respective lockdown measures. Though it is likely that rents will drop in the short-term, while demand is low and vacancies are high, commentators predict a fairly swift recovery after the peak of the downturn. In the long term, the pandemic may even seed a new dynamic into the rental market. Airbnb’s ambition to refocus its business model on longer leases has the potential to transform how assignees and mobility managers source properties worldwide. Some temporary measures enacted by governments in emergency bills may also become developed into long-term statute to protect future landlords and tenants against economic shocks like a global pandemic. This could provoke more intensive compliance checks on renters sourcing properties and their ability to withstand a drop in income. It is likely that rent guarantors will be more commonly requested. Although the future of the rental market is uncertain, mobility managers should remain conscious of the complications in budgeting for, sourcing and negotiating terms on rental properties for assignees in the current climate. 

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