It has been driven by a wave of institutional capital capitalising on urbanisation, privatisation, deregulation and the emergence of an institutional multi-family sector, notably in Ireland and the UK, says UBS.
In H1 2019, investments in European residential accounted for more than 22% of total investment volume, according to data cited by UBS. Investors now recognise residential as a real estate sector which offers long-term rental growth prospects at inflation levels, says UBS. Tight supply in many urban areas has enabled investors to achieve rental growth well above inflation in recent history. After many years of rental growth, affordability of residential rents is now on the political agenda in many European countries.
In its Q4 Real Estate Outlook report, UBS wrote:
“While the downward yield shift in offices and industrial coincided with the cut in central banks’ interest rates from 2011, the path of downward yield shift in residential seems to be more timed to the introduction of central banks’ unconventional monetary policies in 2015. The yield shift in residential looks drastic but the spread of residential yields to office yields has just returned to its long-term average of 130 bps which was only 80 bps just before the introduction of the ECB’s Quantitative Easing program.
“Even though the definition of what constitutes “affordability” is subject to discussion, politicians appear to be focusing on policies limiting rental growth on the landlord side while not tackling the more structural (under) supply side factors.
“Economically successful cities are attracting inward migration, but managing residential supply is mainly the responsibility of the local authority regulating the planning and building laws.”
Investors have started to recognize that investing in residential exposes the invested capital increasingly to regulatory risk, adds UBS. While investment volumes in residential are still at very strong levels, cross-border net-acquisitions have slowed. This could be a sign of residential being a more sophisticated real estate sector but also of increasing investor cautiousness, says UBS.