With so much interest in residential real estate across UK and European markets, Germany’s KGAL has added its voice as to why the asset class continues to appeal. Writes Philipp Langbehn, portfolio manager of Real Estate.
‘For investors, the residential property sector is a safe haven in the property market, as demand for housing and stable income is constantly on the rise. Long-term undersupply and constrained affordability in many global housing markets continue to underpin the investment case for the residential sector, with momentum building in the US, Asia Pacific and Europe despite ongoing market uncertainty.
Its share of the total invest-ment volume has therefore grown rapidly from 12% in 2014 to 22% in 2024. Even in the difficult market environment following the interest rate turnaround, residential investment has proved to be more resilient than other segments.
Transactions have temporarily slowed noticeably, and gross initial yields have risen by an average of around 125 basis points, according to KGAL Research. However, there are already initial signs of a return to growth.
Investors from the US, UK and Middle East have become increasingly active as they see the higher yields and the expected decrease in interest rates as an attractive entry point. European institutional investors remain cautious as the denominator effect limits their investment options. Let's take a look at the fundamentals.
Convincing fundamentals
The high demand in the European housing market is driven by positive population and household growth, migration, continuing urbanisation and declining household sizes. In Europe's major cities, demand continues to grow and is not being met by the limited volume of new construction, which in turn is pushing up rents. Over the past ten years, the share of rental housing in the housing market in the EU and UK has grown by 14%, which equates to 6.6 mln new households.
Cities in the Netherlands, the UK and the Nordic countries are expected to see the highest population and household growth until 2028. High purchase costs and limited government investment in public housing are driving more and more people into the private rent-al sector. Despite rising costs, renting remains more affordable than home ownership. Tenants will be able to partially compensate for rising rents, as income growth of around ten per cent is expected in major Euro-pean cities over the next five years.
Investors in residential real estate benefit from the security of these long-term demand trends, low volatility, predictable risks and returns and the inflation protection of residential investment. According to INREV, the European Association for Investors in Non-Listed Real Estate Funds, residential funds have achieved an average annual total return of 9.3% over the last ten years, 386 basis points more than the second-placed real estate sector.
Ripe for market revitalisation
In addition, inflation in Europe should level off at two per cent as the ECB has initiated the gradual easing of its monetary policy by lowering its key interest rates for the first time in the last five years. This is an im-portant step to bring predictability, confidence and price stabilisation back to the residential property markets and transaction volumes are likely to benefit from will from the improving economic conditions as well as from the strong fundamentals for the residential property market.
There is also another good reason for confidence in the residential segment. The real estate consultancy firm Cushman & Wakefield recently reported that almost 80 per cent of investors expect investment in the residential segment to increase over the next five years. The annual investment volume in the EMEA region is therefore predicted to reach €90 bn to €100 bn.
However, investors should not take a one-size-fits-all approach to investing in Europe, as the potential for multi-family housing varies significantly from city to city. According to our research, Ireland ranks first by some distance, followed by UK, the Netherlands and Spain.
Navigating risks and opportunities
Housing is a defensive asset class that is supported by positive long-term trends - but housing is not a sure-fire success. Investors need to keep also an eye on geopolitics, domestic policy and regulation. The afforda-bility of rents is an important general aspect, potential government intervention in the rental market must be considered and energy requirements are - quite rightly - attracting attention. The selection of the right assets with potential as well as good macro and micro locations is therefore particularly important. Investors need to analyse both the big picture and the individual property down to the last detail and think long-term, i.e. sustainable.'
