Residential property investments are coming to the fore in today’s market but Europe and the UK offer different strategies, experts agreed at the PropertyEU Outlook Investment Briefing, which was held in London this week.

Residential property investments are coming to the fore in today’s market but Europe and the UK offer different strategies, experts agreed at the PropertyEU Outlook Investment Briefing, which was held in London this week.

‘Residential has traditionally been a low-yielding asset class, but the buy-and-hold strategy is increasingly attractive in the current low return environment,’ said Marcus Cieleback, head of research at pan-European investor Patrizia Immobilien. ‘But in the UK the total return is mainly driven by capital growth, while in continental Europe it is driven by cash flow.’

The high granularity of the tenant base and the fact that housing is a basic need are the reason why tenant fluctuations are less correlated with the economic cycle, he said, making residential investments more stable than commercial investments.

Red tape
Regulation is a crucial factor and investors must look at the rental environment in the specific country and city, Cieleback said: ‘There are interesting residential opportunities in most EU countries, but you have to follow changing laws and regulations closely. My advice is be creative, source land and develop the middle market segment, where most of the demand is.’

While in France heavy regulation limits rental growth, the UK market is attractive because it is less regulated, giving more flexibility to investors. The other positive factor is the supply shortages, he said: ‘It is a UK phenomenon and not just a London one. Vacancy rates are below 5% everywhere, and it has got to the point where it acts as a drag on the economy because it hinders workers’ movement.’

For investors who opt for cash flow over capital growth, Germany offers good opportunities. ‘The market is growing fast, demand is high, developers are busy and there is a pick-up in building the like of which we have not seen for 10-15 years,’ said Stephan Rind, chairman of the advisory board at Deutsche Real Estate Funds.

Student housing
Taking its cue from the UK, Germany is also discovering the untapped potential of student housing, Rind said: ‘The UK got to the game early and this year transaction volumes in the sector will be £4 bn. Germany has 2.8 million students and many universities high in the global rankings, but only 220,000 purpose-built student apartments, so the demand is far higher than the current supply.’

The drivers are internal demand from German students moving to university towns but also the rise in international students going to Germany as part of their Erasmus programme, or attracted by German universities’ high international rankings.

‘The increasing mobility of students across Europe offers great opportunities,’ said Rind. ‘Building new purpose-built apartments is one interesting option, but the real potential lies in the conversion of offices and other buildings into student housing, as regulations are now favourable. That is a bullet-proof investment.’

Will Rowson, partner at Hodes Weill & Associates, said there is also a bias towards income-driven strategies among foreign investors, 'and there is no doubt that student housing will provide recession-proof income in years to come'.

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By Nicol Dynes
Investment briefing correspondent