Each residential market may have its own characteristics but, throughout Europe, the context for the participants in these markets has a common theme: Occupier demand far outweighs supply, and rents and house prices move unrelentingly upwards experts said at the recent European Residential Investment Briefing.
Clearly this may be all the encouragement that investors and developers need but that in itself means that the investment end of the market has also become crowded, forcing prices up and cap rates down.
“Most of the resi rental markets that we see in Europe are dysfunctional,” states Rainer Nonnengässer executive chairman of International Campus, Germany. “This means there is way higher demand than supply and rents have been rising sharply.”
In response to the health crisis, changes in work patterns have reduced people’s desire to live in city centres.
“A mixture of having a couple of days in the office, a couple of days at home I think will remain for the majority of companies,” says Clemens Paschke, CEO of Berlin-based broker Ziegert EverEstate. “That opens up a huge possibility for the suburbs given that the space in cities, which is anyway scarce, is getting scarcer every day.”
Already there is huge pressure on the suburbs and prices are now increasing dramatically there too.
“What is quite obvious is that residential with all its subsets – be that student housing, young professionals, senior housing – has a very strong argument for institutional investors in part because they lack alternatives since office and retail face questions and logistics prices have jumped extremely,” Nonnengässer says.
Although some investors also paused for thought during the worst of the covid pandemic, there is now an element of FOMO – fear of missing out – in play says Paschke.
The consequence is that competition is intense. “I also have the feeling that everybody is looking for the same thing,” said Manuel Böcher managing director and head of international transactions Swiss Life Asset.
“That means the price is driven in one direction,” he said, adding that it is particularly difficult to find completed, stabilised residential assets. This forces investors to seek developments and that implies a two-year lead in which gives funds an additional headache because capital is committed for longer before income begins to flow.
All residential markets are under pressure
Geographically, all markets are under similar pressure said Böcher. “We cannot say there is a market which is not hot or under pressure,” but he added that every market has its own characteristics.
In the Nordic markets, for example, city populations are increasing steeply as people migrate from the north parts to the south. “You can talk about a population growth of 10% in the next year, it’s quite dramatic. So therefore there’s substantial demand in the Nordics, especially in the metropolitan area,” Böcher adds.
But the universal challenge is that of affordability of housing.
“It’s all over in the media so it’s one of the hottest topics and especially before and after the election in Germany.” says Paschke. “If you just look at the statistics you see in the major cities that rent levels over the last 10 years have increased by 50% on average. If you look at Berlin, 110%.”
Although the recent attempt to introduce rent control in the Berlin region was reversed, restoring investor confidence, Paschke says rent control policies are present in the agendas of most of the political parties in Germany at present. “It will come to some extent I’m sure, but it will be a Germany wide solution.”