Will single-family housing eclipse multifamily in the European rental market? Michael Keogh explores

Michael Keogh

Michael Keogh: ‘such is the maturing nature of European demographics, few markets can boast a growing single- family housing age cohort’

Inevitably, the ‘living’ sector, which encompasses a wide range of residential types of assets, will become more globally institutionalised as investors seek security of income, yield stability and rental appreciation – and aided by an investor audience greater aligned than ever before with the needs of tomorrow’s world.

Industry analysts are already predicting that the living sector could account for over one third of all direct real estate investment globally by 2030, with its share of capital flows globally having increased from 14% in 2010 to 25% in 2020.

One segment where we expect to see significant change is single-family housing for rent. But is this likely to evolve into an asset class suitable for institutional investors?

A single-family home is a property built for the rental market to service families or individuals looking for additional space or specific home needs. It is a form of build-to-rent (BTR) that focuses on 30-45-year-olds with young families. It is tailored more to the needs of this customer base, unlike most BTR multifamily apartments that appeal to single people and young professional couples.

The BTR multifamily segment generally has a higher proportion of Generation Z and Millennials than the single-family segment, although this varies from country to country in Europe. 

Comparing each segment’s typical tenant, we expect the typical single-family tenant to:

• Be older and more likely to have a family;
• Have a greater desire for local community, infrastructure, schooling and facilities;
• Have more established friendships, interest groups and permanent employment;
• Desire sustainability, connectivity, flexible and additional space, and garden access;
• Desire fewer operational management initiatives;
• Prone to longer lease terms and ability to personalise the house.

The rationale and investment case for single-family housing has three dominant factors: first, it offers defensive investment characteristics and solid projected returns; second, there are clear socio-demographic trends that favour the sector across selective markets; and third, there are favourable demand-and-supply dynamics.

But can institutional investors satisfy single-family housing demand? Knowing which markets have a deep and established rental market, coupled with a preference to live in housing rather than apartments, is vital in terms of determining the scalability of the single-family concept. Liquidity, future demand, occupancy, and performance potential are also factors.

In our analysis of the demographics across Europe, the age cohort 30-49, which is expected to represent the bulk of the single-family consumer base, shows material variance across the region. We can identify two specific categories within that cohort:

• First flight – in their 20s and early 30s, leaving home or further/higher education, getting a job, finding a partner;
• Nesters – in their 30s and 40s, in a stable partnership, probably with children, looking for a larger living space, high-consumption pattern.

Such is the maturing nature of European demographics, few markets can boast a growing single-family housing age cohort. When comparing the last decade with the next, the Nordics, the UK and Poland are the exceptions.

Growth of first flight versus nesters from 2010-20s

The number of households in the 30-49 age cohort declines in Germany, France, Italy and Iberia. These large economies, however, host a large existing demand pool, which modern single-family housing could satisfy, especially given the increasing affordability issues regarding house purchases. Within these countries, there are cities that are expanding in this demand bracket.

Our research findings show growing demand in Stockholm, Copenhagen, Amsterdam, Helsinki and other core European cities from the first flight and nesters age cohorts (see figure). Furthermore, this is in conurbations with established, institutionalised housing markets.

The investment case for single-family housing is based on two strong elements that should appeal to capital looking for defensive yield. They are the prospect of higher yields/income components and the perceived greater counter-cyclical qualities given evidence of less turnover in single-family compared with multifamily.

The current spread that exists – estimated to be approximately 25-75bps, which in part reflects the suburban nature of single-family and lower efficiencies – could be temporary as the sector matures, especially given that, historically, single-family housing is also associated with lower maintenance costs. Evidence from the US, where operating expenditure is about 10-15% in single-family housing, indicates that these costs are about half of that associated in multi-family housing, although this could range if additional amenities and services are offered.

Changing consumer preferences and working habits post-pandemic have spurred interest in single-family housing. While still a nascent sector in the UK and the rest of Europe, the success of the concept in the US implies it could quickly evolve into an institutional asset class.

In some markets, like the UK, Nordics and even the Netherlands and France, where houses and not apartments are the dominant residential asset type, single-family housing could overshadow BTR multi-family in terms of future institutional volume and assets under management.

Michael Keogh is director of research at Nuveen Real Estate