M&G Real Estate's The Greens build-to-rent scheme in Crawley, near London's Gatwick Airport.
Source: M&G Real Estate
In the U.K.'s arduous battle with COVID-19, every silver lining has a cloud. The rapturously received news of an imminent vaccine Nov. 9 was quickly tempered in the days after by the grim milestone of 50,000 COVID-related deaths and a surge in unemployment not seen since 2009.
The unemployment rate rose by 243,000 to 4.8% in the three months to September, up from 4.5%. This will be a worry for the property sector, much of which relies on a healthy and growing business environment to maintain demand for space.
Even one of real estate's more resilient asset classes, residential, has cause for concern. Despite generous government support schemes protecting jobs, and legislation banning evictions, some larger private-rented sector landlords have already seen tenant outflow as a result of the pandemic.
Greater turbulence may lie ahead, Alex Greaves, head of residential investment at M&G Real Estate, which has a build-to-rent fund valued at around £1 billion consisting of 3,000 units, said in an interview. "Do I think there's some stored-up pain coming? Yes, I do," he said. "There's going to be a lot more unemployment, so that is clearly going to create an issue."
The U.K.'s Institute for Fiscal Studies forecast in October that unemployment will rise as high as 8.5% in the first half of 2021. How that figure is affected by the U.K. government's recent extension of its coronavirus job retention scheme, or furlough, remains to be seen.
The scheme will now run to the end of March 2021, not Oct. 31 as originally planned. It pays workers whose employers are unable to provide them with work due to the pandemic 80% of their salary up to £2,500 per month.
Renters have received protection in the form of a ban on evictions during the COVID-19 "national emergency." Landlords must give tenants six months' notice before they can evict until March 2021, except in the most serious of cases, such as incidents of anti-social behavior and domestic abuse.
Even with such measures in place, more than half of the U.K.'s 4.5 million rental households are worried about paying their rent over the winter, and 700,000 are already in arrears with their rent payments, according to a study by the Joseph Rowntree Foundation. JRF estimated that arrears could total up to £400 million in England and Wales.
Worse than the GFC
The disruption caused to residential landlords by the pandemic has been more severe than during the global financial crisis, according to Greaves. Occupancy is lower, rents have fallen more quickly and arrears have gone higher than during the crisis in 2008 and 2009, he said.
M&G saw between 6% to 9% of its tenants leave in the second quarter of 2020, Greaves added. Government restrictions on real estate viewings and home moves during the first lockdown meant that M&G could not replace the 2% to 3% of tenants that it normally expects to leave each month, he said.
Rents in U.K. cities fell by 5.3% year-on-year in October, according to a report by real estate services firm Hamptons International. Meanwhile, rural areas saw rents increase by 5.5% during the same 12-month period. The trend in both locations is being driven by changing behavior among renters as a result of the COVID-19 pandemic, the report said.
While rent collection has remained relatively strong among institutional PRS landlords, whose properties tend to be located in the U.K.'s largest conurbations, the trend since March is negative, according to an October report from real estate services firm Knight Frank. Average rent collection in March was around 97%, but had fallen steadily to below 94% by August.
Grainger PLC, the U.K.'s largest listed PRS-focused landlord, reported occupancy at 91% at the end of August compared to 97% at the same point in 2019, in a September trading update. The company collected 95% of rent due for August, it said.
New kid on the block
The pandemic hit as the U.K. built-to-rent sector was entering another promising year. It has enjoyed a boom in recent years, becoming an attractive alternative for investors struggling to find secure, long-term returns elsewhere in the property sector.
Supported by the U.K's longstanding housing shortage, the sector has grown from a stock of units worth around £1 billion in 2017 to having around 130,000 units built, under construction or in planning, the Knight Frank report said. Committed capital stands at £41 billion in 2020, with a further £19 billion ready to be deployed, it added.
Much of the attraction for investors is the sector's perceived resilience from a cash flow perspective, said Adam Challis, head of EMEA living research and strategy at real estate services firm JLL. "The rent is pretty well protected by individual behaviors," he said. "The way people statistically tend to deal with pressures on finances is to skimp on almost everything else before they skimp on the cost of servicing their home, whether that's a mortgage or a rental."
For tenants left without any income with which to skimp, the outlook is bleak, said Isaac Rose, an organizer at Greater Manchester Tenants' Union.
"When the furlough scheme eventually winds up and we see unemployment rising, the problems of rent debt will just keep accruing," he said. "We're not necessarily going to see people get out of that."
Rose suggested that in situations where tenants owe significant sums to institutional landlords after falling into financial hardship due to the pandemic, the institutions should "take that hit."
M&G's Greaves argues that it already has. In the early months of the pandemic, the landlord allowed tenants who could prove they were financially challenged or returning "home" to leave without penalty on a case-by-case basis.
Landlords who have failed to take similarly sympathetic action may suffer once government support measures are withdrawn in March, said Greaves. "Because we've allowed people to be released, we may have helped alleviate the future problem by taking some of the pain now," he said. "And there inevitably will be more."