A clear migration of investors to tier-2 and -3 cities for residential exposure is taking place, according to a new report by Colliers.
The agent’s latest EMEA European Living Snapshot says that Europe’s fundamental mismatch between voracious housing demand and limited supply is driving massive investment growth in the residential sector and will continue to generate opportunities even amid geopolitical and economic uncertainties.
With investment volumes surging 89% in 2021 and even taking 30% of all real estate investment in Europe, there is no reason to believe demand will taper.
Underlying this growth is what the report describes as ‘strategic levels of under-supply to meet urban household formation and growth'.
Colliers says smaller cities such as Gothenburg and Manchester are capturing more attention. This is beginning to resemble the US where the likes of Charleston, Tucson and San Antonio are courting more demand.
Paddy Allen, national capital markets, UK at Colliers, said: ‘The migration to tier-2 and -3 cities is increasingly evident in Europe’s more mature markets. Places like Gothenburg and Manchester are attracting more attention as investors expand their search for yield.’
The report’s overarching theme is the attractiveness of residential during volatile times.
Luke Dawson, MD cross border capital markets, commented: ‘Amid current economic volatility, the long-term imbalance makes the living sector attractive to capital seeking a defensive, contracyclical investment with a variety of routes to market. Build-to-rent (BtR), for example, is gaining in popularity due to the limited availability of existing stock, alongside investment into social and affordable housing.’
Niche areas such as student accommodation is attracting focused attention, according to Damian Harrington, head of research, EMEA and head of global capital markets research.
‘We’re seeing more activity concentrate on niche areas related to specific demographic factors. PBSA is attracting a lot of interest in markets like Italy, Spain and Central and Eastern Europe.’
The range, scale and strategies for residential investment vary considerably across the globe, adds the report. In Europe, the strongest growth markets have also been those benefiting from a significant share of residential investment. These include the Nordic cities of Stockholm, Malmo, Gothenburg and Copenhagen. Berlin tops the bill, Barcelona is a fast-moving market, with investment levels flourishing courtesy of an expanding residential sector, as are the likes of Madrid, Helsinki, Manchester and Dublin.
Mega deals
Vonovia’s takeover of Deutsche Wohnen in late 2021 created a housing giant with a portfolio of some 568,000 apartments. This cemented Berlin’s position as the fastest-growing residential investment market in Europe, already supported by Germany’s unusually high ratio of renters to owner-occupiers, and now potentially by an influx of new people seeking housing from Ukraine. Challenges ahead include tougher energy efficiency regulations and rising construction costs.
France curbed by tight supply
France logged €7.4bn of residential transactions in 2021, up 7% on the year before and double the total for 2019. One notable trend is the entry into the market of former social housing operators, which are taking sizeable stakes in new housing portfolios under development.
Ireland
Ireland is facing a housing crisis, with the supply of homes either for sale or for rent at record lows and home price inflation surging in 2021. This has inspired a bulging pipeline of BtR construction, supported by the forward funding or forward sale of units to domestic and international investors. New BtR blocks are exempt from a rise in the rate of stamp duty to 10% on the purchase of 10 or more residential units – a recognition of how important such investment is to solving the housing crunch.
Students
Italy is experiencing strong residential investment in cities with renowned universities, such as Bologna, and those with a large population of educated young professionals and high employment, such as Milan. Investors are entering a market that has traditionally been dominated by owner-occupiers and small private landlords; building better-quality housing stock offers an opportunity, but construction costs are rising sharply.
UK
Over 14,500 BtR units were completed in 2021 in the UK, up 24% on the year before, while investment climbed 33% to a record €5.6bn. The growth has led to fears over the possibility of oversupply. However, evidence from Manchester, the UK’s most mature BtR market, suggests otherwise, with rental inflation rates there among the highest in the country. BtR currently only accounts for 9% of total investment volumes into direct real estate in the UK, compared to 35% in the US, making investment saturation unlikely anytime soon.
