RESIDENTIAL BRIEFING: Unpredictability of regulation - not regulation itself - is the enemy

Investors in residential real estate will shy away from countries where regulation is uncertain and there is no guarantee of a stable environment, delegates at PropertyEU's Investment Briefing on pan-European residential investment have heard.

Investors are happy to grapple with the rules that apply in different countries in Europe but they demand certainty, accountability and above all stability, Marcus Cieleback, head of research at Patrizia Immobilien, told the event on Wednesday at the London office of M&G Real Estate.

'Residential can come back as the focus of investors, but the impact of regulation complicates matters. Investors are not afraid of regulation as it means there is a significant market, and regulation does not necessarily have to reduce the return on investment, but the real problem is stability.'

Cieleback pointed out that Sweden is a very strong market despite being the most regulated market in Europe. 'That's because the regulation is stable and provides investors with the certainty they need.'

The low-yield bond environment has made real estate investment in general and residential in particular more attractive to investors across Europe. But despite the growing interest in the asset class, there are some regulatory risks, Cieleback warned.

INSTABILITY THREAT
The two biggest residential markets in Europe – Germany in top position and the UK in second place – are two examples where regulatory stability is at threat. The already heavily regulated German market is facing additional tightening of the rules, while the UK may see more regulation depending on the outcome of the May general elections.

The UK Labour party, which has a slim lead in the opinion polls, has for example spooked investors with talk of re-introducing rent controls, Cieleback said. 'The political risk in the UK is higher.'

However Alex Greaves, fund manager of M&G Real Estate’s UK Residential Fund, believes that common sense is likely to prevail whoever wins the elections. Electoral promises are one thing and real policies quite another, he said: 'The political parties are posturing but the collective view is that the risks are actually small. There is a severe housing shortage in the UK so this is the best time ever to invest in residential and everyone realises that capping rent increases would be a self-defeating policy. The light is not red, I would say green to amber.'

Another example of a market where political issues are affecting the market is the Netherlands, Cieleback said. 'The authorities are likely to block deals by buyers that they regard as short-term investors because they want to see core long-term investments.'

'We have stayed out of the Dutch market precisely for that reason,' added Sascha Wilhelm, COO of Swiss investor Corestate Capital. 'We are purely an opportunistic investor so we know the regulators probably wouldn't be so keen on us.'

Nevertheless, the rules in the Netherlands are clear and consistent, Cieleback said. 'Therefore the market is very competitive and there is a lot of interest from foreign investors.'

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