Covid-19 and the European residential property sector

Panellists struck a note of cautious optimism during last week’s WBEF webinar considering the impact of the Covid-19 crisis on the European residential property sector.

While the prospect of a protracted recession remains cause for concern, most indicators suggest the sector has remained resolute through the early days of the lockdown.

“Residential might be a bit slow in its reaction”, explains Xavier Jongen, Managing Director of Catella Residential Investment Management. “But what we see is that investor appetite is still there – completely different to the global financial crisis of 2008. When we are selling assets, the number of bidders is slightly less, but the pricing is just the same as pre-Covid-19.”

Furthermore, in spite of an unprecedented economic downturn that has hit millions of households across the continent, rental incomes have thus far remained stable. Jongen believes this to be the result of the decisive and extensive measures taken by policymakers. “We have organised a Universal Basic Income. We are, as societies, bailing out our citizens and that has had a massively positive short-term effect. Then you’ve seen the ethics of tenants, who are saying ‘I want to pay.’”

Nonetheless, he acknowledges that the future remains beset by uncertainty – anathema for investors. The severity of the risk will be commensurate with the duration of the lockdown: “If this economic recession lasts longer than originally anticipated, then unemployment will go up and household incomes will be pressured. This will, no doubt, have an impact on prices.”   

Mairéad Carroll, RICS Associate Director of Residential Standards notes a largely unforeseen development in the short-term rental market that could have significant implications for issues of long-term supply.

“The example of AirBnB is striking. We have seen a lot of short lets coming back on to the rental market in a very short period of time. We’re seeing, in places like Edinburgh, Dublin and London, rental prices coming down as a result of that. Renters have more options than they might have had previously; there are homes becoming available and affordable in city centre locations. That could be a really interesting consequence of the crisis, depending on how long it takes before borders reopen and international travel restarts.”

This, clearly, is one manifestation of the current levels of distress in the hospitality and leisure sector. But it serves to demonstrate how the residential sector may emerge from these disrupted times as an unlikely winner. While hospitality has, by most metrics, been hardest hit, it is far from alone in its pain. A raft of vacancies across the commercial sector, occasioned by widely predicted corporate failures resulting from the recession, would be, unequivocally, a bad news story. To governments willing to be flexible on legislation relating to building use classes, it might also present an opportunity to address housing supply shortages. Simon Rubinsohn, Chief Economist with RICS, notes that such a solution can only be workable if rigorously high standards are adhered to.

“Even before this crisis, there has been discussion, and indeed action, around the conversion of some office space to residential. We’ve learned some lessons from this, and RICS has conducted research into this specific area. Without proper standards in place, there is a risk that conversions will not bring about good quality housing. As we move forward, we may not need quite the amount of space devoted to retail or offices; residential is an area where we do need more space. But we need ensure that, with these conversions, we’re not just building the slums of the future.”

The vital role of public bodies and professional institutions in this question is clear. Clemens Kramp expects the state to assume a more active role in the housing sector, inspired as much by social concerns, as economic necessity.

“I think future governments will place more emphasis on affordability. It’s the middle-income group that is now making society work. It’s nurses, teachers and policemen that keep on going. So, providing housing for these groups has become more important.”

While markets slumped as the virus spread, “ESG-aware” companies outperformed their stock market rivals in March. Kramp’s sense that the crisis may prompt a shift in attitude on issues of environmental and social import is shared by Xavier Jongen.

“The keyword must be sustainability. We need to consider already existing innovations, such as energy positive buildings. There was a false dilemma in the past that sustainability always costs extra money. Not true. It will also help with affordability. Energy costs account for 6-7% of median income in Europe – it’s a material number for the average household. I hope that this is something that we will all get much better at. I hope that it will be the silver lining from this crisis”