RESIDENTIAL BRIEFING: Pan-European strategy emerges as a real option

The European market is at a turning point: as the residential sector moves onto the radar of institutional investors, a window is opening for the first time to a truly pan-European strategy.

The opportunities and risks of investing in this long-neglected asset class were discussed at PropertyEU’s pan-European residential Investment Briefing at the London office of M&G this week. During the discussion, panellists agreed that investment volumes in residential will be higher in 2015 than they were last year.

'Residential has traditionally been the lowest-yielding asset class in real estate but now with bond yields converging residential is an attractive bond surrogate,' said Marcus Cieleback, head of research at Patrizia Immobilien. 'Four or five percent yields look attractive compared to bonds, plus cashflow stability is a significant bonus.'

Patrizia's €14 bn portfolio is equally split between residential and commercial real estate, mainly in Germany, but 'we are now open to resi opportunities across Europe,' Cieleback said.

Investors are looking at all different types of residential investments, from core to value-add and opportunistic, and are now also willing to invest in more niche segments like student housing. But huge differences in regulations per country mean that local knowledge and expertise are essential for investments in residential property, Cieleback said. 'Residential investments are more management-intensive and need a presence on the ground. Germany is a case in point: its regional differences are very difficult to monitor from the outside.'

But cross-border investment is increasing and pan-European investment strategies are emerging, with investors looking at regional or city data instead of country data and exploring the effects of urbanisation. That is because the demographic dynamics in cities across Europe – from London to Madrid and from Paris to Frankfurt - are similar, while the differences among countries remain huge. 'A recurrent problem in Europe, from east to west and from the UK to Continental Europe, is that cities offer jobs but not enough houses,' Cieleback said.

LONDON
London is an extreme case, according to Alex Greaves, fund manager, UK Residential Fund at M&G Real Estate. The city has an economy the size of Portugal and the highest levels of private sector employment in the country which translates into potential for rising wages. However, there is a severe shortage of residential accommodation, he said. 'Fifty thousand new homes are needed in London every year and only 20,000 are actually built, so there is a significant shortfall.'

Private renting has doubled in the last 10 years from two to four million households, and rising property prices means that more people are likely to rent for longer because they cannot afford to buy, Greaves said. 'That is why we see residential as a good investment. Our focus is on the 25-34 age group who need to rent, who require a good location and good connectivity, and whose incomes are likely to rise. Return is driven by bedroom numbers, not size, so we see smaller units being built.'

Where there is a shortage of housing stock, as in the UK, institutional capital might turn to new build rather than existing stock, panellists said. Financing is increasingly less of an issue throughout Europe as more capital is targeting real estate, but financing for standing stock is more readily available than financing for new developments which are seen as riskier, Greaves said.

Income expectations must also be in line with the different realities. 'In most European markets residential generates high net initial yield but limited rental growth,' Greaves said. 'In the UK, however, it is the other way around: initial yield may be low but substantial rental growth may be expected.'

MORE
RESIDENTIAL BRIEFING: Unpredictability of regulation - not regulation itself - is the enemy
RESIDENTIAL BRIEFING: Spanish recovery is more than a flash in the pan