In previous downturns, residential property proved the most resilient property sector overall. But what effect might COVID-19 have on the UK’s rental market?
Residential rents and tenant demand have remained more stable than sales during past market slumps, new research has confirmed. This increased consistency was seen across both UK and US markets, according to the latest Savills report which looks at how residential rents behave in a downturn.
The research looked at some major past events which have caused economic difficulties. This includes the global financial crisis of 2008, as well as events like the EU referendum in 2016, the run on Northern Rock in 2007 and the dotcom bubble burst in 2000.
Savills also assesses how the UK rental market could behave during the current climate. Coronavirus will certainly have a huge impact on the UK economy, as well as global markets. While most experts predict recovery to begin once restrictions are lifted, times ahead remain uncertain.
Rental investment a safe haven
Over the past 25 years, house prices have fluctuated more widely than residential rents, says the report. In the aftermath of the credit crunch, the ONS and MSCI found that rents “exceeded their pre-downturn peak within two years”.
During the worst of the crisis, residential rents dropped by -2.2% at the end of 2009. By contrast, office rents fell by -13.5%, retail rents by -5.4% and industrial rents by -4.6%.
Demand was one of the main contributing factors to the steady rents. While new buyer numbers fell at times, such as during the Northern Rock collapse, tenant demand remained consistent. The lack of buyers caused house prices to temporarily decrease during the period, while rents remained largely the same.
For property investors, the data is important to show the resilience of the property market, and in particular the robustness of buy-to-let. During past economic falls, these investments have remained solid in contrast to other sectors and asset classes.
What’s in store after COVID-19?
Savills believes that any rental dips seen after the coronavirus pandemic will be smaller than house price losses. It also thinks rents are likely to pick up again more quickly if they do fall.
It says: “In the long term, the outlook for rental growth will be linked to what households can afford. While we may see short-term fluctuations in rental values as local levels of supply and demand shift, growth over the next five years will be linked to the state of the economy and the strength of income growth.”
Between 2020 and 2024, Savills previously predicted that mainstream UK rents would rise by an average 15.4%. This was based on predicted income growth of around 3% per year over the time period. However, with unemployment on the rise as a direct result of the current crisis, this is likely to change.
The good news is that Oxford Economics believes incomes will only fall by 1.6% this year, and this will be followed by a 5.4% rise. Average annual growth will then return, the firm says, to around 3% per year through to 2024.
Savills concludes that, based on these estimations, total rental growth between 2020 and 2024 will be 13.6%. While this shows a definite negative impact caused by COVID-19, the outlook could certainly be much worse for the rental market.