The social and economic environment in Europe is changing fast, and the residential offer mostly does not match the demand. Nicol Dynes reports.
The housing market needs to diversify and offer more choice to keep up with changing demand, claim market experts.
“The main trend I see is diversification into different sub-sectors within the living sector, because people’s lives have changed and they want a more agile, more flexible way to live,” says Graham Place, chief executive of Box Architects.
“There needs to be a more varied offer in the same place. People of all ages must have more options and be able to upsize or downsize according to their needs without having to move to a different area or town.”
The residential sector has been resilient during the pandemic, but in the post-covid world it
must tackle the new challenges that result from a fast-changing social and economic environment.
“The concept of living is the same because of the human-centric aspect of the product, but the variety is huge,” says Pavlos Gennimatas, managing director of the European Living team at Hines.
“There are different priorities for different demographics, but the trend is to improve the offer, add services and amenities and thereby improve people’s quality of life.”
‘In Denmark, you could not build apartments less than 60 sq m. Now it’s down to 40 sq m, but people still have to share to afford the rent.’
Anne Sofie Vett Raaschou, NREP
Planning regulations and local rules vary, but the situation is similar in most European countries: the offer does not match the demand, in terms of quantity as well as quality. “In Germany, the supply side cannot meet the demand on size, rent, location and layout,” says Rainer Nonnengässer, executive chairman of International Campus, Germany.
“There is so much stock from the 1960s that is the wrong quality and in the wrong place, and needs extensive redevelopment.”
The social landscape has changed in Germany and the traditional family is no longer the norm: 50% of households are without children; in urban areas that rises to 70%.
“There is strong demand for smaller units, not just from students, but also from commuters, singles and professionals of all ages,” says Nonnengässer. “The next five to 10 years will have to bring massive changes to the market.”
The Nordics picture
The Nordics are experiencing similar social flux, as there is less demand for big units for traditional families and more need for smaller homes at lower rents.
“In Denmark, rules are very restrictive. [Previously] you could not build apartments less than 60 sq m in size, now it’s down to 40 sq m, but people still have to share to afford the rent,” says Anne Sofie Vett Raaschou, who is in charge of investments and living at NREP.
“You also can’t build high-rises, so that’s a problem. We want to work with the municipality and be part of the solution, but there are a lot of challenges.”
Some solutions are being found. Last year, the Danish parliament approved the creation of Lynetteholm, an artificial island off the coast of Copenhagen that will house 35,000 people in new homes and also protect the city’s harbour from storm surges and rising sea levels.
But in most cases, planning regulations do not facilitate much-needed change. “In Poland, planning rules are not flexible and it’s not easy to repurpose an office building into residential,” says Agata Jurek-Zbrojska, partner and head of real estate and construction at CMS. “But the legal environment must adapt, because we are living in a period of constant change and traditional thinking must be banished.”
The UK is no exception. “Planning restrictions are very frustrating,” says Place. “They are stopping the necessary development from happening, even if the demand is there and the financing is there.”
Venturing further afield
Competition for assets has led investors to adapt their strategies and venture further afield. “At the beginning, everyone looking at Germany focused on the top seven cities, but with prices rising and the offer shrinking, there has been a shift to secondary cities,” says Nonnengässer.
“There are about 30 to 40 cities that are economically strong, attractive to live in, have excellent universities and a good start-up scene.”
‘We’re interested in places like Milan, where student housing and build-to-rent are just emerging. In Greece, BTR doesn’t exist, so institutional capital is now looking at the country.’
Pavlos Gennimatas, Hines
In Poland, investors realised the attractiveness of secondary cities from the start, says Jurek-Zbrojska. “The German funds led the way in Krakow and Wroclaw and everyone followed, because of the universities, good population size and vibrant atmosphere.”
Residential has evolved into an attractive and accepted asset class that fits well into every institutional portfolio.
“We’re interested in markets like Germany or the Nordics, which are mature but where the supply/demand dynamics will remain, but also in places like Milan, where student housing and BTR [build-to-rent] are just emerging,” says Gennimatas. “Greece, as well, is behind in the growth of the living sector. BTR doesn’t exist, so institutional capital is now looking at the country.”
Student housing, micro-living and BTR, relative newcomers to the European market, are the sectors that have the most potential.
“Most EU countries provide opportunities, especially where PRS is non-existent or under-represented,” says Nonnengässer. “In mature markets, there are repositioning opportunities.”
The war in Ukraine has led many investors to pause activity in the region. Nonnengässer says this is wrong: “The markets in Budapest, Warsaw and Prague have slowed down in the last few weeks, some projects have been suspended and some pulled. It is time to go there.”
Residential in demand in every market
Residential property is in such demand that investors are targeting all segments and locations, experts agree.
“Resi is attractive in every market, mature or emerging,” says Pavlos Gennimatas, managing director of the European Living team at Hines.
“There are different, exciting aspects to every market and there is demand from every generation, from students to young professionals to families to seniors,” adds Gennimatas.
The residential sector, which has shown its resilience during the pandemic, will continue to benefit from buyers’ or tenants’ demand and from investors’ interest.
Build-to-rent (BTR) is definitely a growth area, as new generations are aiming for quality of life and are less likely to buy.
“We’re facing growth in the resi sector because young people cannot afford to buy their own flats, and economic factors like rising inflation and interest rates will only reinforce the situation,” says Agata Jurek-Zbrojska, partner and head of real estate and construction at CMS.
“Residential-for-rent will be even more in demand, even in CEE, where it is a very new sector, not yet at the operational stage.”