AEW: ‘Solid fundamentals’ for Europe’s prime resi markets

European prime residential markets are set to deliver above-inflation rental growth of 2.5% a year in 2024-28, while project investment is forecast to deliver 8.3% per annum over the same period, according to new AEW research.

Long-term supply shortages have become more acute in 2023 in key European cities and the supply pipelines of new housing in the main markets are shrinking, making supply even tighter than before and leading to more rental increases.

London, Berlin, Amsterdam and Madrid are expected to outperform the European average, while Barcelona will see negative rent growth because of the introduction of rent control mechanisms.

“Prime European residential markets show solid occupancy fundamentals,” said Hans Vrensen, head of research and strategy Europe, AEW. “Investment yields have started stabilising, despite the rise in interest rates and associated decline in lending. The supply of new housing remains constrained across the main European markets, exacerbated by rising construction and finance costs.”

Investment volumes halved in 2023, but this year with inflation, interest rates and bond yields expected to decline, price expectations of buyers and sellers are expected to re-align and liquidity to return.

The timing of the re-alignment is likely to be driven in part by the refinancing challenges of legacy debt. In that respect, AEW points out that the residential sector faces a modest 14% relative debt funding gap for 2018-21 loan originations, well below those faced by the retail and office sectors.

“Since 2008 and despite subdued overall investment activity in 2023, the residential sector has doubled its share in total European real estate investment volumes to 20% in 2023,” said Irene Fosse, director of research and strategy Europe, AEW. “It has emerged and solidified its position as a core sector for investors.”

AEW predicts prime residential yield compression to start from H2 2024 and yields to tighten by an average of 400bps by 2028, partly reversing the 130bps widening since mid-2022.

The research highlights student housing as a counter-cyclical sub-sector that benefits from strong demand fundamentals, while yields have proved to be more resilient to the rise in interest rates than prime residential and other sectors.

“Based on our analyses, we project that UK regional university towns and Southern European student housing markets are the most attractive for investment over the next five years,” said Vrensen.