Inflationary environments have typically given a boost to residential rental markets, as potential buyers put off mortgage applications and resign themselves to renting for the foreseeable future.
That’s a strong theme in the UK at the moment, notes Gemma Kendall, head of multifamily EMEA at JLL.
‘There’s a clear appetite for renting at the moment, which has pushed rental growth to over 10% on new lets, with some prime assets achieving considerably higher,’ she notes. We saw a strong start to the first half of this year, and expect that to continue, with affordability being the limiting factor.’ The UK also has particular appeal for its free market rentals, compared to Continental Europe where that isn’t always the case.
However, these impressive metrics are just half the story from an investor’s perspective. ‘Investment volumes have fallen considerably compared to the first half of 2022. One of the reasons for that are the very strong start we had last year. But the main issue is the cost of financing,’ she notes.
‘Across Europe, multifamily yields have moved out by 100 bps, give or take depending on the market. We are still at a point of negative leverage. The other, connected issue is the forward-commitment and -funding market, which tends to be a big proportion of the multifamily market, particularly in the UK. With increased construction costs and yields moving out, it is challenging to make the numbers stack up. But without unlocking further developments, transactions will continue to stall.’
Supply and demand
Rental growth remains one of the sector’s more positive stories, as supply and demand continue to stretch in opposite directions. Again, the UK is a prime case, exacerbated too by small buy-to-let investors exiting the market and reducing supply still further. But this story too has a negative aspect, with renters facing their own spending limits and Big Government tending to keep an eye on this factor.
Notes Kendall: ‘Finland is one of the few markets where supply and demand are well balanced. In Germany and Sweden, markets with much stronger regulations, supply is falling off considerably. Rent control and slow planning processes can dissuade developers, which is obviously problematic, but issues of affordability overall remains a delicate area.’
Are there are any governments which seem closely aligned with the private sector for the much-needed provision of housing? Says Kendall: ‘It feels like none is at the moment, but there does need to be some level of political support to break the supply deadlock. There are models for the public sector to do this: The KfW financing in Germany was very effective, as it provided cheaper financing to developers meeting a specific criteria. Similarly, the recent ruling in Spain has eased concerns about potential punitive rent controls in that market.’
The Berlin case study
Kendall has been based in Berlin for the past 18 months, although her next office will be in London. She says of recent attempts to cap rents in Berlin: ‘The authorities actually brought in a rental cap two years ago, but it was deemed unconstitutional and therefore overturned. However, there is a Mietspiegel, a rental index, to protect tenants.’
However, she notes that rent controls don’t overly affect developers in Germany in any case. ‘Developers and investors are more cautious about markets with changing regulations, where there are rental regulations, you can price it into your cashflow. It tends to be more an issue of predictability.’
For the same reason, affordable or social housing remains a rewarding path for ESG -focused investors and some infrastructure funds. ‘It does depend on the country, but certain impact funds like affordable housing at it enables them to focus on the S as well as the E in ESG,’ she notes. ‘We’ve seen such strategies from the likes of DWS and CBRE IM.’ Kendall recounts having recently assisted on a transaction in Ireland for a social housing portfolio featuring a 25-year, CPI-linked lease to the government, where the returns were ‘very attractive’.
She adds: ‘In markets where the affordable housing rental levels sit 20-25% below market rents, you can be sure that there will be tenant demand and spaces are always going to be filled.’
Stabilising yields
Looking at the multifamily market outlook in Europe, what prospects are there for yields? ‘We are reaching a point where it feels like yields are starting to stabilise, but investors still need a bit more encouragement to return to the market,’ she confirms. ‘If groups have the equity and ability to invest during this interesting pause in deals, they can make some clever decisions around long-term strategies for living funds.
‘We’re also seeing increased interest in European multifamily from overseas investors who aren’t yet exposed to the asset class here, such as Australian, Hong Kong and Singaporean funds. That could make a big difference to the market’s future.’
