While it makes sense for institutional investors to target the upper end of the housing market in urban centres, there is a gap that needs to be filled for the middle-income households that feel increasingly stretched financially, according to AXA Investment Managers’ real assets arm.

Laurent Lavergne, head of fund management separate accounts at AXA Investment Managers — Real Assets, told the IPE Global Conference & Awards 2019 in Amsterdam that the issue of residential real estate was politically sensitive as it covered the basic needs of humankind.

“We have seen quite significant capital going into the upper end of the housing market targeting the wealthiest end of the occupier market, which makes sense, given the level of rental income you need in order to support the land cost in these major cities,” he said.

However, he said this this was leaving a gap for the middle-income households who felt increasingly financially stretched.

“Building affordable housing in urban areas is probably one of the biggest challenges for governments and politicians, but as well by us as real estate investors,” Lavergne said.

Investment in residential real estate had grown significantly over the past two years, he said, to the point where it now stood as the number one property investment target for many pensions investors.

This trend was supported by a very strong rationale, both based on absolute and relative return expectations, he said, with several structural trends providing support to the demand side.

“Demographic and sociological tailwinds are supporting growing demand for housing in all urban centres across the globe, while at the same time these major urban centres are facing the challenge of land availability as well as providing the infrastructure to support this population growth,” said Lavergne.

In a subsequent panel discussion, Clemens Schaefer, managing director at DWS, said that the rent regulation put in place five years ago in Germany had created problems by being drafted in such a way that not everyone adhered to it.

“But if you are a large institution… you cannot not adhere to it,” he said, citing reputational risks.

This was leading to a disparity in the market, because more aggressive investors were building into their business plan things that were not in line with the rent regulation, he said.

“This is part of the reason why we are shopping now also outside Germany for residential,” said Schaefer.

However, Schaefer and Jay Kwan, managing director at QuadReal, agreed that regulation was not per se bad for investors – the problem was the unpredictability of it.

“It’s not the regulation that affects investment decisions, but the unpredictability of what that regulation might be,” said Kwan.

“The waxing and waning over populism makes it so unpredictable, it’s hard to know which way the wind is going to blow for specific regulation, and for taxes,” he said.