KUALA LUMPUR (June 24): As lockdown rules eased in the UK, pent-up rental demand has resulted in a surge in housing market activity, according to CBRE’s “Residential Investment Market June 2020” report.

“Pent-up rental demand drove a surge in housing market activity as agents re-opened towards the end of May. In the first post-lockdown week, tenant demand was up 33% with 23,000 new listings added, so total available stock for rent was up 13% since pre-lockdown,” the report said.

The continued strength of the bounce-back depends on the economic backdrop. CBRE expects a V-shaped recovery with a total 8% fall in GDP in 2020, but the trough will be in 2Q, with an 11.2% fall. The government's furlough scheme has so far kept unemployment figures low, but there have been 2.5 million claims for universal credit since the coronavirus lockdown began, and we expect unemployment to be more than 7% by the end of the year, said CBRE.

“We expect the weaker economy and lockdown to reduce residential sales by 40% this year (compared with 2019). This is likely to boost rental demand as potential first-time buyers delay home purchases. As well as the countercyclical nature of private rented sector (PRS), the long-term demand fundamentals, including population growth, remain strong.

“Social changes, such as increased tertiary education levels, higher levels of student debt, a higher rate of female employment, marrying and starting a family later, can all delay the home buying decision and so boost rental demand. Despite continued demand, the market is still woefully under-supplied; recent tax changes have reduced the appeal of individual ‘Buy to Let’ investing. Institutional development has yet to fill the gap, and net rental stock in the UK has only increased in two out of the last ten quarters,” reported CBRE. 

The report highlighted Multifamily Housing (MFH) in the UK, noting that all indicators pointed to a strong year. Investment levels were the second highest in 1Q2020 since records started in 2014.

“The current pipeline of MFH would, if all built out, double the stock. However, completion rates have been trending down and with fewer units under construction, this trend was expected to continue. This trend will be further magnified due to sites following social distancing rules. Also given most investment in MFH is via forward funding deals, weaker investment this year may reduce the pipeline of stock coming forward. Overall, this may put upward pressure on MFH rents in the medium term,” it said. 

CBRE noted that MFH operators faced an immediate erosion of income through rental payment holidays and an inability for some tenants to cover rents. However, this has yet to fully materialise as rent collection remains high and payment holiday take-up low. 

“Our recent CBRE survey showed 85% of operators had less than 5% of tenants on payment holidays. However, this may change when the furlough scheme ends. Many operators will not be seeking rental increases on renewals during the Covid-19 era, which will limit rental growth this year. MFH has historically proved to be more resilient than other property segments, with rents declining less and recovering quicker during downturns. Our current forecast suggests rents may fall by up to 2% in 2020, but then return to growth in 2021, with increases of between 2% and 4%,” the report said. 

According to the report, forecasts are lowered across all sectors but MFH is expected to outperform in the long term. It has revised its previous projection of MFH total returns of 5.7% in 2020, bringing it down to 0.3% largely due to falling capital values. 

“We expect total returns to pick up strongly, with average returns of 5% per annum over the following five years. This gives MFH the highest projected average total return; Industrial is the next best performer at 4.5%.”

CBRE’s recent survey suggested that MFH investors expect the sector to continue to attract capital, including some diverted from retail and hospitality sectors. Some 50% of MFH investors also expect positive rental growth of up to 2% this year. 

“We had expected the momentum from 1Q2020 to continue over the rest of 2020 with £1.6 billion on market and £0.8 billion under offer at that time. However, 2Q2020 is now looking weak with several deals on hold or retracted. As a result, 2020 is likely to be below last year. Factoring in resilient residential demand and our client survey findings, a pick-up in MFH investment volumes is likely to outpace overall volume growth,” said CBRE.