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COVID-19 in Residential Real Estate: How the Ongoing Pandemic Re-defines Our Homes

Clara Giampellegrini

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December 28, 2020

The disruptive character of Covid-19 has led to a great number of changes in 2020 and will leave lasting consequences as we are facing one of the biggest economic crises since the Great Depression, according to economic experts (Deloitte, 2020).

After analyzing its impact on commercial real estate (cf. COVID-19 in commercial real estate: Purely destructive or creating new opportunities?, November 24th 2020), we are now looking at another important area of the sector: the residential property market. As a matter of fact, measures such as social distancing and lockdown changed how we socialize, how we live, and thus how we reside. The impact on the residential real estate market is multiple, with economic and financial consequences influencing investments and prices, and psychological effects re-shaping our needs when it comes to choosing a home. With change come opportunities, and as always, those who are best informed will make the most out of them.

Compared to the financial crisis of 2008, the current downturn is different in nature, and banks and developers are in better financial condition (Deloitte, 2020). One of the triggering factors of the 2008 crisis, when developers massively decreased construction projects due to financial difficulties, leading to a surge in residential property pricing, could be avoided this time. Many different assumptions have been made, and the uncertainty of the future makes it hard to draw clear conclusions. However, the altered buying and selling behavior in the property sector since the first outburst in March predicts possible new trends for the future of residential real estate.

After the implementation of the first measures in Europe, most residential markets froze. The number of new deals decreased drastically as personal property inspections were impossible to perform during lockdown. Construction works were put on hold, especially in countries where a significant number of construction labor comes from abroad, and deals were cancelled last minute.

Rental markets took the biggest hit, mostly in major cities such as Paris, Rome, Prague or Budapest, where short-term accommodations are occupied by numerous tourists every year.
Deloitte, 2020

Rental markets took the biggest hit, mostly in major cities such as Paris, Rome, Prague or Budapest, where short-term accommodations are occupied by numerous tourists every year. With travel laid low during the pandemic, such properties entered the long-term rental markets, putting pressure on rents to decrease.

However, it is impossible to draw a universal conclusion of the impact of Covid-19 on residential real estate as it varies strongly from country to country. On the one hand, countries which have been hit hard by the virus, such as the UK, or who have always had a slower property market, risk to face stronger and predominantly negative repercussions. On the other hand, markets with strong fundaments for further development of the residential market do not expect to see major changes, and even anticipate a positive outlook.

Banks have become more cautious, and changed their terms for mortgage loans since the outburst of the pandemic, which could slow down future investments. Financial institutions now ask for higher deposits, take a closer look at debt ratios, job tenure or risk of unemployment.
Vincent Quillé, Managing Director of mortgage broker Nexfin in an interview with RTL, 2020

Within the Luxembourg real estate market, the residential is by far the strongest and runs a lower risk of being hit by the crisis. Nevertheless, banks have become more cautious, and changed their terms for mortgage loans since the outburst of the pandemic, which could slow down future investments. Financial institutions now ask for higher deposits, take a closer look at debt ratios, job tenure or risk of unemployment (Nexfin, 2020). However, the steadily growing population of the country ensures an optimistic outlook on the increasing demand in the market. In general, the demand for property in Luxembourg is stable, and experts do not see any reason for the residential real estate market in Luxembourg to collapse (PwC, 2020).

The steadily growing population of the country ensures an optimistic outlook on the increasing demand in the market. In general, the demand for property in Luxembourg is stable, and experts do not see any reason for the residential real estate market in Luxembourg to collapse.
PwC, 2020

At large, with almost every central bank in Europe offering interest rates close to zero, investment in residential real estate is encouraged, and estimates about the property markets are optimistic. Naturally, the future of the real estate market depends strongly on the economic development and financial decisions of the individual governments.

Another important, but often underestimated, aspect is the psychological impact of the pandemic on the needs of potential homebuyers or tenants. “Home” has been re-defined in 2020 and extended from conventional home to workplace, gym, and (to the extent possible) social hub at once. A new need and use of space emerged, and search criteria adjusted to them. As many companies have already announced that they will continue to integrate the concept of home office in the future, extra space and multi-functional rooms are likely to become a decisive feature for properties in the future. Developers are, and should be, reconsidering layouts to accommodate tenants working from home.

"Small spaces” was the biggest complaint from owners about their homes during the pandemic.
realtor.com & Toluna Insights, 2020

In general, the trend of smaller homes and “micro-apartments” might take an end before ever reaching its peak. A survey of 1,300 homeowners conducted by realtor.com and Toluna Insights found “small spaces” was the biggest complaint from owners about their homes during the pandemic. Especially in city centers, tenants begin to express a strong desire for more space and outdoor areas. Some might even consider moving into quiet, suburban areas with more green space. Being stuck inside, people may realize what is important to them in a home and in their space. In Luxembourg, similar behavior has been observed, called “home sizing”. It mainly describes people in their forties who desire to move from apartments into homes with more space, gardens or terraces (Vincent Quillé, Managing Director at mortgage broker Nexfin, 2020).

The future development of the virus, as well as the fear of the outburst of future pandemics will be decisive factors in the shaping of the demand of home seekers. It is crucial for the players of the real estate industry to be aware of such needs and to adapt.

House viewings have been further replaced by online 3D tours, and the adoption of touchless technology, including remote access for locks and thermostats, are slowly but steadily becoming standard for multifamily building owners.
JP Morgan, 2020

Covid-19 not only changed what is demanded, but also how. With social distancing and lockdown making it almost impossible to sell properties the traditional way, the pandemic left agencies no choice other than to digitalize the process of property selling. House viewings have been further replaced by online 3D tours, and the adoption of touchless technology, including remote access for locks and thermostats, are slowly but steadily becoming standard for multifamily building owners (JP Morgan, 2020).

Proptech was expected to be largely integrated in the real estate market for years, and with Covid-19 accelerating the process, the players of the industry are strongly advised to adapt sooner than one might have expected.


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