The impact of COVID-19 on BTR sector

In this last instalment of the series, Sebastian Moritz – Director of MORICON, will look at the impact COVID-19 had on the industry. What are the effects for tenants, property owners and investors and what are possible solutions. Closing this article, he looks at the sustainability of the BTR model, the financial considerations and processes.

MORICON Consultants shares thoughts on the Build to Rent market in the UK over a series of 5 short articles. The topic was part of the IRPM Build to Rent Level 4 course assignment and reflects only the authors’ opinion.

1.   Effects of COVID-19 pandemic on our business

The current pandemic will create a shift in the rental market – for businesses as well for tenants that was unprecedented. Covid-19 caused more of a massive impact than felt during the financial crisis in 2008 or SARS in 2003.

1.1. Effects for Tenants

The financial impact will have several facets: tenants being furloughed or made redundant will impact their rent payments[i]. Once the government’s ban on evictions on August 23^rd[ii] (extended from 25^th June via MHCLG) is expired, the market must make some difficult decisions[iii] – especially for younger tenants: will evictions be the norm or is the industry opting for a phased payment model similar to the commercial tenants? There is however a sentiment that the situation is not that desperate: the Home Let Rental Index reported, that despite COVID-19 rents in UK grew in May, except for London and Northern Ireland.[iv] In the last statistics from the Office of National Statistics (ONS), the level of rents have risen to the highest level ever[v] – which will create a many tenants vying for a decently prices accommodation and thus creates a new higher barrier to rent.

1.2. Impact for Landlords 

• people leaving or moving from jobs
• shared accommodation in favour of single units
• students moving back home
• changes in work patterns result in more work from

This all has created a sharp increase of rental applications and movement on the market.

How someone is looked after in a time of crisis will be remembered and capturing this insight and sentiment from residents now will be powerful for longer-term brand reputation and loyalty. Now is a good time to be speaking to residents, getting feedback, and making sure residents’ needs are met.  How property owners deal with rent-arrears, repairs, customer satisfaction etc. will have significant impact on their cashflows but also on their reputation and perception in the market.

Making the most of your property’s amenities can also help to create a better functioning community for the building. This helps strengthening the income stream because of reluctance to move away and enjoy more referrals that way.

Lastly – the traditional high street agents will struggle with marketing and conversion operating the “old way”. A well-rehearsed virtual walk-through and subsequent advertising on social media will confirm the growing shift from outdoor above the line (AIL) to online through the line (TTL) campaign via social channels.

1.3 Effects for Investors

The latest research from Property Hub has revealed, that 98% of property investors still consider property to be a good long-term investment. Many investors ride out the challenges, but others are eager exploiting new market conditions. With 80% saying they are likely to invest over the next six to 12 months, compared to the 19% who have shelved their plans for the time being. [vi]

The survey continues that only 6% of investors surveyed expected rental values to drop, while 19% are expecting an increase. While the report initially thought investors might start to have a bias towards income-generating properties, this indicates their strategies might not change at all and investors will still be in two categories. Those who invest primarily for capital growth (long-term) and those who invest for income – although there are those who combine the two.

The BLT property owner on the other side is more under siege: falling rents, unemployment, lack of suitable BLT mortgage products – those with over-extended borrowing might be forced to sell.[vii]

1.4 Solutions

Investors / Owners can combat this pressure in adapting to the new market conditions, by:

• Reviewing building design: smaller communal spaces in favour or work pods, fast and stable internet infrastructure, creating of rentable mini-offices
• Access different sources of credit: think about REITS, establishing closed-end fonds to secure capital, researching new loan structures[viii]
• Perfecting the sales process: well-rehearsed and choreographed virtual viewings, simplifying contracts, implementation of digital signature tools to close deals faster and with confidence in technology.
• Reworking current standards and communication protocols: enable tenants to be fully informed, being close to your tenants means keeping them in the building, establishing fast customer feedback and problem resolution mechanisms to demonstrate you care.
• Revisiting sites that benefit from PDR regulations and that are currently valued less due to pressure on the office retail market.
• Negotiating pro-actively with tenants: it is better to agree a planned rent-payment schedule, deferral schemes and rent-holidays on your terms, than accepting insolvency of tenants, long void periods and additional overheads.
• Employing higher BREEAM standards to lower operating costs and to attract clients – this will be mainly around air-filtration and general sanitation/hygiene equipment.