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With lockdowns and social distancing measures keeping people at home, tenants in the U.S. are struggling to make their rental payments.

According to a new report from Bryan Reid, executive director of MSCI Research, and Niel Harmse, senior associate at Global Real Estate Research, their rent relief requests are starting to affect equity investors. Reid and Harmse analyzed fund and asset level data for 107 real estate funds in the UK, Europe, Australia and North America.

Unsurprisingly, the pandemic hit retail and hotel rental revenues the hardest. From December to June, the NOI of retail wealth declined 21.4% and hotel wealth declined 39.7%. NOI growth was flat in the office and residential sectors, while the industrial sector rose 1.4%, according to the MSCI Global Quarterly Property Fund Index.

Reid and Harmse also rated the distribution returns among the funds they tracked to see if they are revealing something that property income isn't. Globally, they saw the spread between the NOI yield on assets and the distribution yield widen by 20 basis points.

"Because their cash flows were disrupted, many funds have adjusted shareholder distributions by slowing, suspending or postponing payouts," wrote Reid and Harmse. "As a result, the spread between asset-level NOI returns and fund distribution returns has widened, suggesting that property-level rental income may be below provisions."

While investor debt as a percentage of gross asset value at the core of MSCI's open property indices has fallen to pre-financial crisis levels, rent cuts during the pandemic could potentially make it difficult for some borrowers to service their loans.

Reid and Harmse calculate simple debt service coverage ratios using data from the MSCI / PREA US ACOE Quarterly Property Fund Index. They found that massive drops in sales had a significant impact on rates.

At the end of 2019, the NOI to borrowing cost ratio for retail was 5.0. Six months later it fell to 3.3. "While the retail assets in the US ACOE index still generated more than three times as much NOI as the cost of borrowing, the observed reduction in the buffer could also be repeated outside the core markets," write Reid and Harmse. "Therefore, with assets with higher debt or less pre-pandemic buffer, the drop in income could lead to more serious maintenance risks."


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