In so many respects, residential investment stands apart from other real estate asset classes. It is personal, it is granular and very rarely does it offer trophy assets or prestige.
No investor frets much about the brand risk associated with grade-A offices, and it is unlikely that owners of an industrial shed need worry themselves about a locked-out tenant at 2am.
Yet there is something about residential investment that is becoming fashionable in Europe. Moreover, there is a compelling set of fundamentals that underpin this opportunity, which many traditional institutional investors had previously overlooked.
European residential investment has traditionally been a domestic activity. As a highly political, highly regulated sector, it has largely been left to the institutions within a country that better understand its nuances and are perfectly happy looking towards the very long-term, stable income flows that this conservative inflation hedge appears to offer.
In the main this has been perfectly sensible, generally providing stable cash flows whether times were good or not. Yet the new wave of capital sees things differently.
Alternative real estate investment has seen phenomenal growth over the past few years. Volumes in the UK have grown from £700m in 2009 to £8.3bn in 2013. This has been driven in part by the need to chase yield beyond very competitive core property assets, alongside a surge in capital from new entrants.
The 2014 JLL Alternative Investment survey revealed an estimated £10bn of new capital will target opportunities in areas such as care homes healthcare, student living and – importantly – the private rented sector over the next five years.
Until recently, the return profile of residential property in Europe has largely been defined by the few active sectors of northern Europe and Scandinavia. These highly regulated, very stable income-producing markets have come to define the asset class.
However, this is an incomplete picture of the opportunity, as regulatory controls are becoming more relaxed in some of these traditional markets, such as the Netherlands, and at the same time more open markets, such as in the UK, are offering a more compelling balance of capital growth and income.
The opportunity for residential investment is best reflected by the North American multi-family sector, which has been a trading asset class for well over three decades. In that time it has grown to become the largest property asset class in the US. Moreover, on a risk-adjusted basis, residential has been the best-returning property investment over nearly every five-year period since its creation.
Following this lead, a new wave of capital for residential investment will move forward to the key markets of Europe. Growth of £2bn-£3bn seems likely over the medium term. However, a lack of quality assets and portfolios available to purchase will constrain activity. In the short term this is likely to sharpen yields as the weight of capital continues to seek out sufficient scale in the sector.
Over the longer term, a new wave of purpose-built rental properties is expected to come forward, particularly in Europe’s larger, cosmopolitan cities. Growing and maturing demand volumes will drive a modern rental asset class, orientated towards city centre locations and near to public transport nodes.
With investor attitudes to residential property continuing to improve, the longer-term prospects for a European-styled multi-family asset class looks strong. It is underpinned by structural changes to the demand for rental property and a supportive political climate in many markets that sees a need to significantly expand the quality and quantity of rental stock to meet this growing requirement.
