Solutions are being hampered by a misalignment between capital and policy, writes Iryna Pylypchuk
Europe’s housing crisis is not simply a matter of insufficient capital or construction capacity. It is fundamentally impacted by a misalignment between institutional investors and policymakers – the two pivotal stakeholders with the capability to ease the crisis.
Over the last few years, INREV carried out an in-depth research series among leading investors and investment managers on the European intermediary private-rented sector (PRS). The latest in-depth research report – Institutional Investment in European PRS: Strategies, barriers and pathways to supply – reveals two key insights. The first is that institutional investors are eager to commit long-term capital to accelerate the much-needed delivery of affordable, sustainable housing across European markets. The second is that policy uncertainty is the primary barrier to the effective deployment of that capital. Fixing this disconnect is an urgent task.
Policy risk is central to investment decision making
Around €600bn of institutional capital is already invested in European residential, and the allocations are growing, making residential the largest segment in the European non-listed real estate universe. Concentrated in housing for middle-income households, much of it represents the pensions and savings of the public sector and other workers. Their return requirements are long-term and inflation-linked, but policy certainty is fundamental to investment viability. Based on housing policy stated requirements over the next 10 years and the average cost of delivery per housing unit reported by active stakeholders, an estimated €11.8trn of capital is required to meet the housing needs of Europe’s largest seven countries alone. The sheer scale of capital required dwarfs the existing investments and highlights the level of urgency.
Policy risk is now being overlaid onto investment strategies, used to flag and avoid markets where the regulatory environment is prone to frequent change, making it unpredictable. When capital retreats from those markets, it does not disappear or wait on the sidelines. It moves to fixed income or alternative residential segments that are viable and offer higher risk-adjusted returns with no unpredictable policy components.
Michael Fink, managing director at Catella Investment Management, explains: “Policy risk is significant, and the risk rises in cities with low and further deteriorating affordability. This redirects capital to lower policy risk second and third tier cities, or to different, modern segments of residential, like student housing or serviced apartments.”
The consequence is not simply less investment in housing. It is an investment misallocated away from the markets and households that need it most. Capital that could be funding mid-market residential supply is instead flowing to segments and cities where the regulatory environment is more predictable, compounding the shortage in the places where affordability pressure is already most acute. Worse still is when this capital moves away from the residential segment altogether.
Unintended consequences of policy interventions
Long-term housing investment strategies, particularly develop-to-hold approaches with execution timelines of 10 to 12 years, fix their assumptions at the outset. Land prices, construction costs and income projections are all determined by the regulatory framework at the point of investment. A policy change midway through that timeline cannot be retrospectively absorbed, rendering the original business plan unviable.
The Netherlands provides the starkest recent example. The 2024 Affordable Rent Act replaced a rent-based system with a quality score system overnight, pushing middle-income rentals into regulated thresholds well below market rents. Existing business plans were wiped out. The result was a two-year halt in new supply and widespread market withdrawal. Some investors pivoted to build-to-sell to salvage their positions, which is precisely the opposite of what the market needed.
“When capital retreats from those markets, it does not disappear or wait on the sidelines. It moves to fixed income or alternative residential segments that are viable and offer higher risk-adjusted returns with no unpredictable policy components.”
This is on top of the two prior increases in the Dutch real estate transfer tax for investors in 2021 and 2023, rendering the market and diverting capital. The government is responding – an active policy debate is underway to restore the conditions that make residential investment viable. A first signal came at the start of 2026, with the real estate transfer tax for residential property investors cut from 10.4% to 8%, and further measures are expected to follow.
Vincent Mezard, global head of hospitality and residential at BNPP AM Alts, frames the broader pattern: “Institutional investors combine the patient capital and long-term outlook which are key to large-scale housing delivery. When regulation is unpredictable and planning reform is piecemeal, the build-to-rent sector can become a more challenging area for investors seeking resilient income streams.”
Policy interventions in Berlin and Paris have been less acutely damaging but are more structural. Rent controls have created two-tier markets where the differential between old and new stock is so large that tenants have no incentive to move, even as their circumstances change. Households hold onto homes that no longer fit their needs because moving means paying significantly more, and the natural churn that would otherwise free up supply disappears. The people bearing the greatest cost are younger renters, students and those in transitional circumstances – precisely the cohorts most in need of affordable housing.
Policymakers in Ireland have taken a deliberately pragmatic approach to the issue with a comprehensive policy reset. By rebalancing rent regulation with investor requirements and unlocking infrastructure-ready land, Ireland has significantly boosted its attractiveness as a target for real estate investors with a set of reforms at the end of 2026. According to INREV’s 2026 Investment Intentions survey, Ireland has become a top-10 European destination for the first time in 14 years, reflecting the fact that policy designed with institutional capital requirements in mind works.
Investors embrace regulation
By and large, institutional investors welcome regulatory oversight. Frameworks that support predictable, inflation-linked net returns over the long term are what institutional capital needs to function. What’s much harder for investors to manage is regulatory uncertainty and the prospect of sudden retrospective shifts in direction that undermine or completely destroy an established business case. The establishment of the European Housing Alliance is a positive signal, but open dialogue and strategic partnership between policymakers and investors, rather than consultation after the fact, is what will actually unlock the capital Europe needs.
Institutional capital is ready and willing to play its part. But there remains some lack of understanding on the part of some policymakers that this capital carries a fiduciary obligation to the pension holders and savers from whom it originates. That’s changing, but there is a clear need to step up. The irony is that many of these savers and policyholders are the same middle-income households that some of the policy interventions – such as rent controls – are designed to protect.
Ilkka Tomperi, partner and COO at Capman Real Estate, observes: “As a Nordic real estate investor, I welcome the INREV report’s emphasis on stable and predictable policy frameworks. Consistent regulation is crucial for unlocking institutional capital and accelerating the delivery of affordable and sustainable housing across Europe. The Nordic region illustrates how both more regulated and highly liberal markets can function well in their own ways. For investors, the essential task is to understand the operating environment and trust in the long-term stability of the framework.”
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