- According to PATRIZIA’s Residential Market Report 2023, Europe is still the top global destination for diversifying through cross-border investment, despite global transactions in the living sector being down by c.50% year-on-year
- In Europe, investors from the Americas accounted for around 45% of cross-border capital flows, followed by European investors (c.40%) and APAC investors (c.15%)
- Ongoing solid market fundamentals ensure investors reap the benefits of residential investing, proven by the favourable total return performance in 2022, compared with other real estate sectors
- When looking at progress on ESG, the real estate industry still lacks a robust set of standards and objectives to guide the assessment and delivery of social value
Augsburg, 4 October 2023. PATRIZIA, a leading partner for global real assets, has released the key trends from its Residential Market Report 2023/24. While global transactions in the living sector were down 52% year-on-year, robust cross-border investment activity has ensured the residential sector remains an attractive asset class for institutional investors seeking portfolio diversification and stable income.
Robust fundamentals underpin a challenging European market
Europe remains the number one destination for cross-border capital flows into residential assets, accounting for c.70% of global cross-border transactions on a rolling annual basis. Around 45% of the capital came from investors in the Americas, while just under 40% came from European investors and c.15% from investors in APAC. The United Kingdom, Germany, the Nordics and Spain are the preferred destinations within Europe.
Multifamily or build-to-rent (BTR) remains dominant in Europe, with the sector accounting for more than 60% of total institutional investment volumes in the living sector. However, living alternatives, such as student, have increased their share of investment volumes thanks to more robust transaction activity over the last 12 months due to its counter-cyclical nature.
Marcus Cieleback, Chief Urban Economist at PATRIZIA, said: “Despite the incredibly tough economic environment, Europe’s residential market continues to offer a hugely compelling and wide range of products for investors seeking diversification and stable income streams with some degree of inflation protection. Urbanisation is still the driving force for housing demand in Europe, in spite of all the discussions about working from home and households moving to the countryside in a post-pandemic world.”
Continued market opportunities in Asia-Pacific with Japan still dominant
Japan remained the dominant institutional residential market in Asia-Pacific, leading the region’s multifamily sector. In Japan, residential transaction volumes stood at EUR 6.7 billion on a rolling YOY basis – a decline of just 14.8% compared to the global living sector decline of 52%. The performance of the Japanese residential sector is underpinned by a strong tenant market, with occupancy rates standing at around 98% in the country’s major markets.
In addition to Japan, a new institutional residential market is emerging in Australia, where BTR currently only accounts for 0.2% of the total value of its residential market (vs. 5.2% in the UK). With Australia’s population expected to grow at 1.4% a year over the next 22 years, alongside a rapidly accelerating affordability crisis, there is a significant supply-demand imbalance, providing an attractive investment case for institutional investors.
A comprehensive regulatory addition needed on the ‘S’ & ‘G’, not just the ‘E’
When shaping ESG strategies in the residential sector, much of the focus is on decarbonisation or the ‘E’. However, the implementation of ESG principles around social responsibility and governance still lack the institutional and regulatory foundations that support progress on environmental issues.
The real estate industry still lacks a robust set of standards and objectives to guide the delivery and assessment of social value. While social value is notoriously difficult to define, taking a city level approach with a social value framework can identify the specific social challenges that cities face and provide an investment case. A social value indicator framework should therefore be built on data and information regarding housing affordability and homelessness, loneliness (best case by age group), mental health and drug abuse, as well as inequality and social mobility.
Affordability is an increasing problem heavily linked to the degree of urbanisation taking place across the globe. Investments guided by such a social values framework should ultimately have the goal of delivering ‘affordable housing’ within cities for the most challenged households.
A positive fundamental outlook for the living sector
“Global housing demand continues to be driven by the long-term megatrends of urbanisation and demographic changes, which are accelerating the densification of metropolitan areas, as well as demand for accommodation at every stage of life. These solid underlying trends, combined with shifting consumer preferences for renting instead of owning a property, paint a positive picture for the future of institutional investment in the living sector,” Marcus adds.
The supply-demand imbalance in the living sector is expected to continue due to a shrinking development pipeline at a time when demand is accelerating. Gross additions to the European housing stock are, in general, not expected to exceed 1% of existing stock from 2022 to 2024.
When identifying specific markets for investment, CEE cities remain a market to be watched, despite the current economic cycle impacted by rising interest rates, inflation, the Russia-Ukraine war, the current refugee crisis, and geopolitical tensions. In the more mature western European markets, cities like Malmö, Vienna, Helsinki and the Randstad region, as well as locations in the well-connected commuter belt of cities like Paris and the German Top-7 cities, will continue to be an attractive investment proposition. In addition, cities like Barcelona and Dublin, in countries with a maturing rental market, will also provide strong opportunities for institutional capital.
In the alternative living sector, student housing remains ‘the place to be’, with supportive long-term fundamentals being driven by the globalisation of education and continuous undersupply of PBSA. Paris, London and Madrid are expected to remain attractive cities for PBSA investment due to a strong international student base, while Vienna and Stockholm will continue to offer interesting long-term investment prospects thanks to a vibrant domestic student market. Similarly, assisted and senior living assets also provide a positive long-term picture for investors due to the ongoing demographic change in Europe.
PATRIZIA: A leading partner for global real assets
With operations around the world, PATRIZIA has been offering investment opportunities in real estate and infrastructure assets for institutional, semi-professional and private investors for 39 years. PATRIZIA manages around EUR 58 billion in assets and employs over 1,000 professionals at 28 locations worldwide. PATRIZIA has been making an impact since 1984 by helping children in need, since 1992 in close collaboration with Bunter Kreis (“colourful circle”) in Germany for aftercare of children with severe diseases and since 1999 through its support for the PATRIZIA Foundation. The PATRIZIA Foundation has helped around 280,000 children in need worldwide gain access to education and thus, has given them the chance of a better life over the last 24 years. You can find further information at www.patrizia.ag
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