26 / 11 / 21 - 5 minute read
House prices continued to soar during the global pandemic, fuelled by low-interest rates and high demand. Looking ahead, growth in the housing market will continue, although it is slowing in some markets.
“The COVID-19 crisis has not changed the positive outlook for the residential market,” says Marcus Cieleback, Chief Urban Economist at PATRIZIA AG. “Market fundamentals for investing in Europe remain largely unchanged, despite the economic environment. Residential property will continue to provide attractive returns.”
Ultimately, the low risk of residential property can add stability to an investment portfolio, states PATRIZIA in The Future of Residential. According to the report, investors can look forward to total returns for European buy-and-hold multifamily housing strategies between 5% and 6% over the short term (next five years), with income returns between 2.5% and 3.5%.
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Current economic uncertainty means that wage levels are barely budging, and most employees will have to wait for a long time for any significant salary increase. Therefore, household income is set to stagnate.
At the same time, the growing demand for residential property in cities is outstripping supply, causing rents and housing prices to skyrocket. As a result, housing is becoming less affordable for many, draining the ability of young people, low-income workers and even some members of the affluent middle classes to buy somewhere to live. The same is true of rents. In many European cities, rents are stretching the budget of many households.
To offset rising rents and keep housing affordable, grants to subsidise housing need to be introduced, particularly for those in lower-income brackets.
Investors also need to consider how to keep rents affordable, says Nathalie Winkelmann, Head of Fund Management Residential at PATRIZIA AG. “To stay relevant and attractive for large groups of tenants, residential investments need to consider affordability concepts and apply them across different segments, including multi-family housing, senior living and student accommodation. Keeping living affordable and rents at a reasonable share of tenants’ incomes contributes to creating a resilient income stream and low default rates throughout the lifetime of an investment.”
Cities are drawing in more and more people as the pace of urbanisation speeds up. In fact, by 2050, approximately 85% of European citizens will live in cities, according to an OECD report.
Cities are clearly the place to be. That said, the geography of city investments is changing. Real estate prices in top European cities are plateauing at a high price level. Meanwhile, smaller cities are catching up with their more powerful neighbours.
The likes of Aarhus in Denmark, Coventry in the UK, or Uppsala in Sweden offer differing education and innovation levels and economic power to leading European capitals. Real estate in such cities is becoming more attractive for institutional investing and set to provide healthy diversification in future residential portfolios.
Meanwhile, residential concepts are evolving and opening possibilities to invest. An ageing population is emphasising the need for more senior living accommodation that provides customised solutions for the elderly, and tailored services and amenities to match their lifestyle preferences.
The idea of co-living or common space living is also increasingly taking hold. This modern form of communal living, where residents have their own bedroom with shared common areas, can work well for young global professionals. This allows them to afford to live in major cities and get their foot on the career ladder.
Emerging big data technologies are likewise set to transform residential real estate property investing. Employing an array of data variables can paint a more accurate picture of a location’s risks and opportunities, capturing the dynamic between cities and real estate developments within them. For instance, data intelligence can identify trends and potential at a street level rather than at a neighbourhood level, accurately working out how city areas will develop.
Take the PATRIZIA Amenities Magnet as an example. This includes a database of 25 million “Points of Interest” (POI) gathered from European cities. For example, London has 252,896 POI, Madrid has 81,957, while Paris has a massive 405,733. These types of insights can provide valuable guidance to investors.
Annual investment volumes in residential have grown from €7 billion EUR in 2009 to €62 billion for the 12 months from Q4 2020 compared. That’s a change from less than €100 million per week to more than €1 billion per week. This trend is set to continue.
The market fundamentals for housing remain strong, pointing to stable and attractive returns ahead. The combination of falling equity and bond prices is increasingly shifting investor balance away from fixed income and towards real estate, profoundly changing the asset mix of many portfolios. Residential real estate can act as a stabiliser in a portfolio, providing investors with a 250-300 basis point yield spread compared with an average ten-year government bond yield.
Residential real estate is part of PATRIZIA’s DNA. PATRIZIA boasts a strong residential track record, with more than 12 billion EUR in assets under management in the residential sector, backed by a dedicated pan-European residential team in transactions, asset and fund management. For over 37 years, residential has played a pivotal role in PATRIZIA’s past and present – just as it will do in its future.