Fierce investor competition to add residential assets to portfolios is pushing European yields in the sector to record low levels, say market experts.
The hottest residential markets in terms of pricing are still the top German cities and Paris, but as investors begin to diversify to cross-border locations, yields are starting to converge across Europe, sector experts told PropertyEU at Expo.
‘The reality is that it is just a question of time before the (prime) yield goes under 2% because there is so much capital chasing residential - it’s the market where money has been pouring in,’ said Per Erikson CEO Germany at Swiss Life Asset Managers.
Swiss Life, which has been buying stabilised, income-producing residential in the last four years for its €1.1 bn NAV Living and Working Fund and more recently its €550 mln European Living Fund, was just one of many investors at Expo targeting the sector.
Commerz Real’s CEO Henning Koch said the fund manager had spent ‘between €1.1-€1.2 bn on residential so far in 2021’, much of it for its huge Hausinvest balanced fund. Barings’ head of Germany Sascha Becker said buying build-to-rent residential was a ‘priority’ next year for its €3 bn European balanced fund: ‘Unfortunately, we haven’t secured the right deal yet’.
André Zücker of KGAL said: ‘We still see opportunities, but here and there the market is getting overheated. We are starting to invest outside Germany, especially in affordable housing.’
Increasing competition for income-producing, stabilised assets has seen yields in Paris and German cities compress ‘to 2%-2.5%’, CBRE’s EMEA residential cross-border head Thomas Westerhof noted.
‘We’re seeing new capital coming in on a daily basis and now we’re seeing yield compression across core cities in Europe, converging to a European average. For example, they are near 3% in Copenhagen and Amsterdam. Copenhagen is interesting as yields were 3.6% six months ago.’
Nils Vinck, head of capital markets in France for Cushman & Wakefield, said residential had been a growing investment sector there while office transaction volumes had declined. ‘Yes, residential yields are low’, he agreed. ‘But the cashflow is secure and since the crisis investors are trying to buy more diversification.’
Westerhof predicted there will be more cross-border residential portfolios sold next year, following the giant Akelius sale of German and Nordic housing to Heimstaden in September.
Investors at Expo who want higher return residential assets said they were looking in smaller cities or the suburbs, or outside core North-western European countries. Or they are forward-funding development, especially in specialist sub-sectors of the residential asset class.
Sebastian Nitsch of developer 6B47 said: ‘We are developing housing in Poland, to rent and to sell. The yield is still at 6% now. We see many Scandinavian investors coming in. The residential product for rent is relatively new for Poland. Young people want to rent, habits have changed. In a few years yields will go to 4%.’
KGAL‘s Zücker is targeting developments as well as standing assets, in Spain and Poland as well as the Netherlands. CBRE Investment Management’s European CIO Paul Gibson explained that their strategy is to buy only affordable housing via its UK and European residential investing strategies.
Andre Schmoller, CIO of Domicil which bought a €300 mln+ residential portfolio from Swiss Life in September, says the group invests its balance sheet in Germany but in B and C cities where rents are much lower and in forward purchases and student and micro properties for its main pension fund client PFA.
For long-time hotel consultant Michael Widmann, managing partner at PKF, the wave of interest in specialist residential asset classes is a once-in-a-lifetime shift in real estate. The firm sees the growing number of serviced living operations springing up - aparthotels; serviced apartments; assisted/senior living; student housing; co-living; branded residences for young professionals; micro-living - as becoming bigger than the hotel sector.
‘The serviced living sector is exploding and I believe it will be much bigger than hotels, billions bigger because of demographic trends like the high cost of renting and a desire for more services. I’ve been at PKF for 33 years and this huge wave is changing our industry. Hotels are playing catch up now.’
