Rental income is the lifeblood of real estate. Without it, property funds are not able to pay distributions to shareholders and borrowers cannot service their debt. The contractual nature of property rental income, a key feature of the asset class, underpins asset values and by extension property and fund returns.
The COVID-19 pandemic has impacted the business operations of many real estate occupiers, stressing landlords’ rental-income streams. To illustrate the extent of the impact, we compared the asset-level income return of five regional MSCI property-fund indexes for the six-month periods ended December 2019 and June 2020. All five indexes showed lower income return in June 2020 compared to December 2019.
Using the MSCI Global Quarterly Property Fund Index, we assessed the impact of the pandemic on asset-level net operating income across the main property sectors. Effects were not uniformly distributed, with retail and hotel assets particularly impacted by lockdowns and social distancing, while the industrial sector continued its outperformance.
While some of the income disruption currently being experienced may be temporary and reversible once the pandemic is over, considerable uncertainty remains for real estate investors, in both debt and equity real estate. With the virus continuing to impact global economies and the path to recovery still unknown, rent stress and income disruption may continue for some time.