Government regulation and the Covid fall-out are buffeting the European residential real estate sector, but experts say seasoned investors can still make a tidy nest egg.
The pan-European residential investment scene is an increasingly dynamic market place, but investors lacking experience in the sector run risks of making rookie mistakes, according to a panel of leading experts in the asset class.
‘Today’s increased demand for residential from international institutional investors is not just from real estate investors,’ said Allen Chilten, managing director and head of fund capital markets at PATRIZIA. ‘We are seeing bond investors looking at the residential space for its similarities with bond income and the kind of yields they seek. For us, it’s key to have local specialists on the ground, and over the last 36 years, Patrizia’s experts have accumulated a wealth and breadth of knowledge – whilst many new investors are still navigating the sector’s complexities.’
Chilten was speaking at PropertyEU’s Residential Outlook 2020 Roundtable, a closed-door debate featuring heavyweights AXA IM - Real Assets, Bonard, Catella, CBRE Global Investors, Colliers, Patrizia and Trei Real Estate.
Recent figures from CBRE show that pan-European residential investment volumes have been closing the gap on office investment, with multifamily volumes reaching €33 bn for the first half of 2020 compared to €41 bn for offices. However, the roundtable’s participants agreed that the shift was in line with some compelling, long-term urbanisation trends.
Urbanisation trends
Said Joe Persechino, head of residential and student accommodation at AXA IM – Real Assets: ‘We don’t think that the urbanisation trend is going to go away – people will still want to live in cities.’ However, the global pandemic has definitely been throwing some interesting curve-balls, raising questions about the necessity of living in prime, downtown locations for work-related reasons, he added. ‘We are also talking a lot about suburbanisation, and if people will look to move further out to larger homes, with a garden or extra bedroom, if they don’t have to be in the office so much.’
Added Xavier Jongen, managing director of European residential at Catella: ‘City living in places like London or Paris arose as part of the industrial revolution – it’s where the jobs were. Further employment, services, and high-quality leisure followed. Right now, if you are living in a city like that, the restaurants and theatres are closed, the offices are empty, but you are still paying a lot. Why would you do that if you could live further out?’
Yet Paul Oremus, fund manager of the Dutch residential fund at CBRE Global Investors, countered: ‘We’ve been talking about people escaping to the country for a long time – well before Covid – but it hasn’t been happening. Most people are moving into cities to enjoy amenities. We think that trend will continue.’
‘The long-term lifestyle trends undoubtedly back the case for rented residential,’ said Samuel Vetrak, CEO of Bonard. ‘We live in a shared economy, where people increasingly buy less and rent more, including residences, as well as are getting married and taking on mortgages about five years later than in the past. This all supports already strong rented residential asset class fundamentals.’
Covid impacts
Overall, the panel’s consensus was that the Covid-19 crisis has mostly backed the argument for residential strategies. ‘The residential investment case was already booming pre-Covid – post-pandemic it’s even more convincing,’ said Jacek Wesolowski, managing director, Poland at Trei Real Estate, referencing the Polish market, where the company has a significant residential-for-sale investment business and is planning to pioneer private rental sector (PRS) initiatives. ‘Whatever you build right now, you can sell immediately,’ he noted. ‘The pandemic significantly slowed planning procedures and site works, so any completed or nearly completed stock is very valuable. And we’re not just seeing this in the capital, Warsaw, but all over Poland.’
Added Gunnar Larsson, director of capital markets for Sweden at Colliers: ‘In Sweden, institutional residential is actually the biggest investment class at the moment. Even in times of crisis, it’s an area that investors flock towards. Build-to-rent (BTR), public use properties with government-backed or semi-government-backed leases - long or short - are the two strongest sectors. We’ve seen almost no price reductions – it’s almost been the other way round.’ He added: ‘It’s also interesting that BTR projects sometimes trade at a premium to build-for-sale right now, in a key sign of the times.’
Said Oremus: ‘The Dutch picture is not so different, it is quite resilient, and prices increased, even during the second quarter of this year, with collection rates still quite high. We think this is all due to the imbalance between supply and demand, a phenomenon seen not just in the Netherlands, but right across Europe.’
‘Segments such as student housing and residential are a lighthouse for capital at the moment,’ said Bonard’s Vetrak, ‘as they are suffering much less than offices and retail. Funds are divesting from other asset classes, but not this one.’
Confirmed Patrizia’s Chilten: ‘The pandemic has just heightened the trends that were already happening in the residential space and has reinforced our belief in those trends. From a client perspective, our investors benefit from the power of our data intelligence tools, as well as us having people on the ground with deep local knowledge and proven expertise – we have over 200 residential specialists in our 19 offices across Europe. We think it’s that combination that enables us to identify winning micro areas, and then the relevant property strategy to suit the community in that micro area as we believe in building sustainable communities.’
However, Jongen of Catella warned investors against believing that Covid would only support the sector’s fundamentals. ‘If you look at the history of residential, there are three factors which are generally bad for housing markets; excessive debt, public health scares, and socio-political tensions. Despite the presence of all three, the sector is doing well, but there’s no room for complacency.’
He added: ‘We are not really witnessing the impact of Covid on the residential markets, but the impact of monetary policy. Revolutionary government intervention with furlough schemes has helped pay rents and mortgages to date. So, the public policy aspect is crucial to our discussions.’
AXA IMRA’s Persechino countered: ‘Residential is resilient because of its essentiality - the first bill that people want to pay is the roof over their heads.’
Regulatory factors
The panellists agreed that government intervention, and matters such as rental caps, add a layer of complexity to the residential sector when compared with other asset classes. The rent control situation in Berlin, which hit headlines earlier this year, was cited as both a warning and an occasionally helpful standard.
CBRE GI’s Oremus, a champion of impact investing, argued that ESG-oriented investments and specifically those linked to attainable and affordable housing tenures could offer predictable, steady returns. He said: ‘We think we should focus on affordability, as when people live in a decent home they also need to be able to afford it long term. We anticipate that a future economic upswing, post-crisis, will overheat residential markets and doubtlessly result in further regulation.’ He added: ‘While we are largely in favour of that, we would like to see inflation-linked rents, plus room to invest in sustainability.’
‘Regulation isn’t a huge issue in purpose-built student housing; most cities and urban planners are supportive of the asset class,’ Vetrak said. ‘Sometimes we see governments making political statements about doing a lot of public stock, or retrofitting existing stock, but it honestly rarely happens. So the private sector remains the only development route for the market.’
Added Larsson: ‘Residential is a highly political matter in Sweden, but we’re not moving towards rent controls, rather in the opposite direction. It is true that the market is largely under-rented. Long term, investors would prefer to have professionally managed real estate assets with dedicated teams addressing matters like community and sustainability.’
Suggested Wesolowski: ‘The residential market in Poland is completely unregulated – we don’t have rental caps at all. I often talk to different mayors but at a city level, there’s not really awareness about the availability of these kinds of tools. The public sector is still required to provide social housing, but it’s quite a headache for them – so we see a real opportunity to deliver housing stock for the cities.’
Persechino confirmed that the regulatory factor was something that AXA IMRA continued to monitor moving forward. ‘While understanding society’s needs, we have to balance our approach to take into account investor return requirements.’
The appeal of beds
Beyond multifamily, a number of the panellists shared that they were also investing in other kinds of living assets in line with relevant trends and to promote diversification. Said Chilten: ‘Patrizia’s Living Cities flagship European residential fund has apportioned 20% to student housing and co-living, and we continue to believe in these sectors long term.
We think that Covid-19 may provide some slight turbulence in the short term, which may provide opportunities – in any case, we are taking a long-term view here. Our focus is the robustness of the income side and low volatility. We are also investing in the senior sector as well, not so much healthcare as light-touch, age-appropriate housing for individuals who are downsizing.’
Said Trei’s Wesolowski: ‘Our broad focus is in bringing foreign capital to Poland. We also have a successful retail parks business, backed by strong yields in the 8-9% range, attracting family money and institutional money in significant amounts. We are successful in selling houses and want to and really kickstart the Polish PRS in the years to come.’
Sustainability rules
The debate closed with a focus on sustainability. Said Jongen: ‘If there is a silver lining to the crisis of this year, let’s hope that it’s sustainability, which is arguably an even bigger problem than Covid. Property is still one of the world’s biggest producers of carbon emissions, so we have a responsibility to act. Impact investing is an important step forward.’
‘We are a true believer in sustainability,’ Oremus underlined. ‘Mainly to lower carbon emissions, but we also like to commit to ESG and UN goals. As governments are struggling to hit sustainability targets, sooner or later, energy taxes will rise, so we would be wise to be a step ahead in terms of future-proofing assets.’
‘Aside from carbon footprint reduction, making a positive, social impact on the communities where we invest is a significant part of sustainability for us at Patrizia,’ Chilten explained. ‘Providing high quality, affordable housing which builds communities and enhances living conditions in European cities, is something we believe in passionately.’
‘Sustainability is not only important in the light of regulation, but is now a private markets matter,’ said Vetrak. ‘The Student Hotel in Toulouse secured a favourable interest rate with green adjustments to the project. Also, target audiences like students and young professionals have clear ideas about wanting to live in a place with a friendly footprint and backed by innovation.’
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We all need some education
A side discussion of the residential roundtable tackled the trends in student housing investments, with Samuel Vetrak, CEO of market research and data specialists Bonard, sharing his expertise. ‘We monitor over 5,600 buildings plus an ample pipeline of assets in the student and co-living space, plus some senior living properties,’ Vetrak explained.
‘Student housing is more resilient in the current circumstances – I’m not talking so much about Covid as in the case of an economic downturn.
‘People tend to study more in a recession, a trend which has been confirmed over the past 70 years. Every recession brings more students - 2009 perhaps brought the most.’
He added: ‘It’s a healthy asset class, there are not a lot of distressed properties. Opportunistic investors are now speeding up their decision-making and entering these asset classes faster. We do expect that 2020 will be a more expensive year.
‘All research shows that students are ready to come, even if they are forced to postpone decisions, there is no lack of demand. For example, during the Covid crisis in Germany, most of the student housing went from a 97-98% occupancy to 91-93%. The properties that we are monitoring through mystery shopping are fully occupied with students that stayed on throughout lockdown. Bookings are actually 30% stronger across Europe than last year.
‘These strong fundamentals mean that people see these asset classes very positively even in the short term, and certainly in the long term. I have not encountered one institutional, private or family office investor who has divested from the student housing asset class over the last seven months – not in Asia, Europe or the US.’
AXA IM- Real Asset’s head of residential and student accommodation, Joe Persechino, agreed that the outlook was strong but added a note of caution. ‘I have certainly been championing the sector over the last 10 years, and it has been super resilient – not just counter-cyclical but almost anti-cyclical,’ he said. ‘However, the one thing that could hurt the industry – a global pandemic – has happened. Going forward, while we are still investing in the sector and have some transactions which are hopefully going to complete soon, how those assets perform – and how long they take to come back to pre-Covid occupancy levels – will certainly be a factor in our thinking going forward.’
