Residential sector set to become more institutional
Large investors have the resources to deal with the challenges of sustainability, higher interest rates and the availability of financing. Nicol Dynes reports.
Tightening regulations on environmental, social and governance (ESG) requirements for buildings will have far-reaching consequences for the residential sector.
“The wider living sector will become much more institutional, because private landlords will find it difficult to comply,” says Beverley Kilbride, chief operating officer for Europe at LaSalle Investment Management.
Market conditions have also become more difficult and the real extent of the difficulties has not become apparent yet.
“We haven’t seen real distress yet, but it will surely come,” says Nigel Allsopp, head of investment strategy research for Europe at Greystar. “I think distress will come in the second half of this year.”
As more institutional investors are drawn to the residential sector because of strong demand across Europe, they will also have the capability and resources to deal with the challenges of sustainability as well as higher interest rates and less availability of financing.
‘The living sector will become much more institutional, because private landlords will find it difficult to comply [with ESG requirements for buildings].’
Beverley Kilbride, LaSalle Investment Management
Higher energy efficiency and emissions standards which now apply to the office sector in more and more European countries will soon apply to the residential sector as well.
“With the introduction of minimum energy-efficiency standards in the UK, many office buildings will not be fit for purpose any more,” says Allsopp.
“Also, in the Netherlands the scoring system has been changed to give energy-efficient products more points, which leads to cheaper financing. At current rates, that is very interesting.”
France and Spain are already looking at imposing these rules on the residential sector.
The social impact element
“Institutional investors have a very acute interest in the full spectrum of residential,” says Kilbride. “What is important for us is always investing in a product that is fit for purpose. This combines with a strong push for ESG and having a positive impact on society.”
It is a time of uncertainty and everyone is wondering what the impact of inflation and higher interest rates will be, but there are also risk opportunities out there. “Many people are questioning the fundamentals of the market and whether it is set up for resilience, but I think the answer to that question is ‘yes’,” Kilbride says.
Indirect benefits can result from investment decisions in the real estate sector. There is always a social impact angle to investments in residential property.
Investing in a high-quality senior-living asset or portfolio can affect the wider living sector, for example. “Creating high-quality accommodation for seniors can often free up space that can be renovated and then be used by a whole family,” Kilbride says. “Senior and student housing are also sectors that should be sheltered from rent increases.”
Some investors are nervous about regulated products, she says, but “some of our core funds invest in the regulated sector in Denmark and the Netherlands, and as long-term investors we find it reassuring because it gives certainty”.
The rental market has changed with the emergence of real estate as a service. “There has been a paradigm shift away from rentier landlords who just extracted rent from tenants,” says Allsopp.
“Now many mobile professionals choose to rent because they want to, not because they can’t afford to buy, and in order to attract them you have to provide very high levels of service.”
Redevco will add 45 residential units to an outdated retail property on Herestraat 74, 76 and 78 in the centre of Groningen in the northern Netherlands. The apartments will be constructed entirely from wood on the second to fifth floors
Affordable housing in demand
Providing more housing, especially if it is affordable, is the quickest way to have a positive social impact, as demand far outstrips supply across Europe.
“There is a huge lack of affordable housing in Spain, with half a million units needed,” says Henry Gallego, chief executive and chairman of Ktesios SOCIMI. “Prices in prime locations are too high, so we only invest in the outskirts of cities or in smaller towns, where rents can be €350-€400, which is truly affordable.”
Ktesios has opted not to do developments, both for environmental reasons and because of high construction costs.
It focuses on repurposing existing buildings in smaller towns or on the outskirts of big cities.
‘We are long-term investors and want to have a positive social impact, add value, create sustainable and future-proof places and improve our financial returns.’
Vincent Bacas, Redevco
“International investors tend to focus on prime locations in big cities, pushing prices sky-high, but they need to study geography, because there is life outside Madrid,” says Gallego. “We invest in the areas where the Amazon hubs are, in locations where gross yields are at a very interesting 10%-14% and where we can have a positive social impact.”
There is a lack of housing in the Dutch market as well, which has led Redevco to repurpose retail assets. In Groningen, which is a university town that needs more student housing, Redevco has reduced its retail assets on the high street to two storeys and added residential on top, built in wood to be sustainable.
“The Netherlands is our primary focus and we need one million new homes by 2030, especially affordable houses,” says Vincent Bacas, portfolio director at Redevco. “Housing in general is in really high demand.”
The group is looking at affordable housing from the perspective of “liveability”, he says. That means not just focusing on the building, but also the surroundings and services that can be offered and have a positive impact on tenants. These include coffee shops, shared spaces and rooftops, and other measures designed to create a sense of community.
“We have changed our strategy, because we are long-term investors and want to have a positive social impact, add value, create sustainable and future-proof places and improve our financial returns at the same time,” Bacas says.
“We are really optimistic about residential and we’ll continue to invest in the sector, he adds.”