The title says it all: the new research report by Primonial REIM on the European residential sector is called The Great Acceleration. Resi is in great demand across Europe and it has emerged as one of the winners of the pandemic.
While the great financial crisis and the European sovereign debt crisis both led to a drop in house prices in many countries, the health crisis of 2020/21 has had the opposite effect. The European residential sector has seen prices and demand accelerate and institutions increase their exposure.
The rise of institutional investment in block housing works hand-in-hand with these developments. Since 2018, residential real estate has overtaken retail to become the second most invested in sector behind offices.
The same pattern is visible in many European cities, the report explains: construction volumes never fully recovered from the GFC, leading to a wide and growing gap between ever-increasing demand and limited supply.
“Confounding some predictions made during the first lockdown, we are not seeing an urban exodus towards smaller towns but rather a re-organisation within major urban centres,” said Henry-Aurélien Natter, head of research, Primonial REIM.
The city of today and of tomorrow is inter-generational: it hosts several age groups with different needs. This will lead to the further growth of residential models that can satisfy this new demand, from co-living to Build-to-Rent and from student accommodation to senior housing.
The demand for rented accommodation has increased in the Eurozone as house prices have risen, making it more difficult for people to get on the housing ladder. This shift to renting has been particularly noticeable in Spain and Portugal.
Three out of ten residents rent in Europe on average, but there are huge differences between countries. In Romania and Hungary owner-occupiers are the majority, while in Switzerland, Germany, Austria and Denmark renters are the majority. France, Belgium, the Netherlands, Sweden and Ireland are in line with European average.
Positive trenes for European resi to 2023
European residential markets will see positive trends in total returns between now and 2023, Primonial REIM believes, thanks to the economic recovery, economic activity that is likely to be stimulated by the European recovery package over the next few years, the shortage of supply and the attractive level of mortgage rates. These factors are likely to contribute to maintaining price growth in the Eurozone residential sector through to 2023.
“Residential real estate currently offers a risk premium of between 200bp and 600bp, with prime yields close to those on prime office assets,” said Natter. “Residential valuations are not irrational but instead offer the prospect of stable growth, assuming an unchanged interest rate environment.”
For investors, linking residential real estate to stages of life can offer attractive diversification as well as tick the impact investing box. “Such investments can provide social advantages, thus allowing investors to meet their ESG and /or SRI targets,” said Natter. “Morever in recent years residential real estate has demonstrated its ability to offer regular and stable revenue flows whilst also providing attractive capital returns.”