Residential ‘most resilient sector’ with 5% total return

Europe’s residential sector will show an average prime total return of 5.1% over next five years according to research from AEW which said that on a risk-adjusted basis, it is the most attractive property sector.

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Publishing its internal forecasts on rental growth, yields and total returns across 24 different European residential markets for the first time the firm said that the private-rented sector/ multifamily / residential – call it what you will – is “the most resilient of all property types”.

“Residential income streams are underpinned by a primary human need and come from a diversified individual tenant base, while supply constraints limit void periods,” AEW concludes. That means that residential investments offer bond-like, stable and predictable cash flows.

It also means that residential total returns have historically been less volatile than other property types, while generating prime total returns close to 8% pa.

Lack of supply combined with new household formations creating strong demand is driving prime rental growth in most European markets.

Projected growth 2.6% pa despite rent control

“Despite an increasing number of rental regulations to ensure affordability for tenants, prime residential rental growth is projected at 2.6% p.a. over the next five years on average in Europe,” AEW stated.

The drive for sustainability means that transition risks are significant with steep reduction pathways expected to be met to respect the Paris Accord. However, the firm said institutional investors are in the best position to green the residential stock due to their ability to improve the energy efficiency of entire residential buildings and through championing best-in-class developments.

“The residential sector continues to offer institutional investors a substitute to bonds, with potential for inflation-linked rental upside and capital growth delivering resilient returns,” said AEW’s head of research, managing director Hans Vrensen. “However, more focus must be placed on decarbonising the existing residential stock, which could be at risk of obsolescence if not properly addressed by the industry at large.”

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