The rental markets of today are now global
An increasing number of international investors are discovering that there are opportunities to be had in the European rental housing market. Cross-border investments are rising sharply in this market segment and Marcus Cieleback, Chief Economist at PATRIZIA, explains the reasons why.
Some developments immediately cause a stir and hit the headlines, even if – at face value – they are not quite as dramatic as one might think. Others take place unnoticed, with the general public not even realising what is happening. This is currently the case with home ownership in Europe. For decades, there has been a continual rise in the number of people who live in their own four walls or own their homes. When the financial crisis came about in 2008, this trend stopped.
The rise in the proportion of people renting can be seen by looking at figures issued by Eurostat, the EU body responsible for providing statistical information. In 2010, 71 per cent of EU citizens still owned the property they lived in. By 2015, this had slumped to 69.4 per cent. One reason for this development is that governments are increasingly likely to feel that high levels of home ownership are not necessarily a good thing. In Spain for example – a country with lots of homeowners at 80 per cent – many people were hit badly by property market impacts following the Lehman Brothers collapse in 2008. Many homeowners had bought property in the hope that house prices would continue to rise. When the financial crisis set in, they could no longer afford repayments and the mortgage interest. As a consequence, they had to hand their keys to the bank.
Despite this, a big, well-functioning rental housing market gives people more ways to move into smaller and more affordable properties, for example if they lose their jobs or experience financial difficulties for other reasons. A robust rental housing market is also good for an economy because it is easier for people to move to other areas and work elsewhere. Living in your own four walls can be like wearing a ball and chain, hampering mobility. For specialists and managers to be more flexible in terms of location, it’s also important that there are enough affordable flats to rent out to people from lower income groups, as well as more premium rental options for more demanding customers.
An opportunity for investors
The fact that the rental housing market is now more important and larger is a major opportunity for investors. This is because a rise in supply goes hand in hand with a rise in liquidity, so more properties can exchange ownership. This has indeed been the case. The transaction volumes for blocks of flats have risen sharply in Europe such that in 2018, they were at their highest level since records began. In some countries, this was the result of deliberate government policy. For example in the Netherlands, the authorities already started approaching foreign investors a number of years ago as part of a move to make the domestic housing market more flexible. Of course the rise in the number of property transactions also had something to do with the fact that real estate is fundamentally attractive when interest rates are low, especially if there is a dearth of alternative investment options.
Institutional investors are no longer just investing their capital in office blocks, hotels or logistics properties. They also want to get into multi-residence blocks of flats. One advantage such properties offer over commercial properties is that cash flows are more regular and predictable. As such, they could almost be compared to government bonds, just with higher yields. People will always need a roof over their heads, so well-maintained apartments in sought-after locations are highly likely to offer good leasing potential in the long term. Furthermore, things have changed since the crisis of 2008 and 2009 in another important way: investors are now no longer willing to become involved in adventurous debt capital arrangements, especially if they could result in structural deficiencies. They generally now prefer high equity ratios.
Another factor speaking in favour of investments in the housing market is the way it is currently benefiting from the global trend towards urbanisation. According to the estimates of the United Nations, the proportion of people who live in urban areas and conurbations will rise from 74 per cent today to over 80 per cent in 2050. In Europe, too, cities with strong economies are attracting more people. Despite this, in many cities there is already a shortage of attractive and affordable flats to let. Investors can therefore anticipate rising rental incomes and appreciations in capital value.
This trend will grow stronger because most urban areas and cities are currently failing to build enough new homes. The number of new flats and homes built every year in EU countries only accounts for between 0.5 and 1.5 per cent of all residential properties. Assuming the average house or block of flats can be used for 100 years, this rate of construction will only just be enough to keep the number of homes level. This will not be enough to answer rising demand. There is therefore little danger of oversupply in the residential property market. Quite the opposite: the gap between supply and demand will widen, and this will push rental levels up even higher.
Keep a close eye on regulation
The authorities in many countries are now trying to curb rising rental levels through political measures. One striking example of this is in Germany, where there is a ceiling on rental prices. Regulatory intervention does not necessarily mean that a housing market has to be less attractive to investors. The best example of this can be found in Sweden. Although the Swedish housing market is extremely strictly regulated, from an investor standpoint it’s an attractive market. It is nonetheless important for investors to understand the political framework of the markets and to take the complexity of domestic markets into account when working out their strategy. For investments in this area to succeed, compared to other asset classes it’s all the more important to have a solid grasp of regulatory conditions and the specific nature of each market. Investors would do wisely to tap into local knowledge so as not to be wrong-footed by political decisions.
Another thing that is always important with property is to conduct detailed checks on the location. Even if the underlying trend looks good, not every location in every town or city makes for a successful investment. Investors should therefore not allow themselves to be talked into too many ‘location compromises’. If, however, they do assess the location and analyse the overall situation carefully, residential property can be an attractive and safe investment offering plenty of good prospects. According to calculations carried out by PATRIZIA Immobilien AG, over the next five years, owners of real estate stock can expect average annual yields of between six and eight per cent.