European residential market: Home, sweet (affordable, green) home?

30 / 10 / 23 - 5 minute read

Rising inflation, soaring energy costs and a gruelling cost-of-living crisis are placing affordability high on the agenda for residential real estate investors. At the same time, the housing market is under increasing pressure to meet tightening environmental targets. But are ‘green’ and ‘affordability’ complementary or conflicting goals when looking at the perspectives of the European residential real estate market?

In recent years, the real estate industry was set on a clear, albeit challenging, course: making property future-proof in terms of energy efficiency and sustainability requirements. Investors directed their investment focus towards ESG (environmental,

Dr Marcus Cieleback, PATRIZIA Chief Urban Economist

E versus S – and what about G?

So, just how comfortably does affordability sit with stricter environmental targets in the realm of ESG? Essentially, some environmental and social goals can complement each other. However, many goals are contradictory.

The push and pull between E and S is one of the areas where PATRIZIA sees a lot of future challenges, according to PATRIZIA Chief Urban Economist, Dr Marcus Cieleback. “Affordability is a huge challenge across Europe while, at the same time, everybody is increasing the environmental requirements for existing stock,” Marcus says. “This will inevitably result in rising costs. Realistically, those people already struggling with spiralling daily living costs are unlikely to be able to increase their costs to meet the next round of energy reduction targets.”

If not adequately addressed, this conflict between environmental and social goals threatens to become more extreme and endanger the environmental targets already in place. As a matter of urgency, the real estate industry is therefore pressed to resolve this dichotomy of needs.

In addition, Marcus calls for regulators to supplement detailed existing environmental legislation with sufficient social and governmental regulation. “A lot of legal activities are geared towards the environment because of the regulations already in place,” he says. “However, we also need to ensure that regulation of the social aspects of ESG are not overlooked and are taken into account. This will enable market players to work in a coherent environment.”

Data eases energy efficiency

Looking ahead, technology is poised to play an increasing role in the residential market as we endeavour to become more energy-efficient in our built environment. Privacy issues remain a stumbling block, however, as these prevent people from tracking data and information that show how best to manage buildings.

This will create a challenging environment going forward, Marcus points out. “The more we realise the importance of becoming energy-efficient, the more privacy issues will have to be tackled in a way that allows people to comply with efficiency regulations,” he states.

House of cards

Looking at the overall residential market, it’s important to distinguish between the ‘for sale’ market on the one hand and the rental market on the other hand, as the current economic environment is subjecting both sectors to differing market forces. Rising interest rates, negative real income growth and the energy crisis have put purchasing a home out of reach for most householders or equally challenged them to refinance existing mortgages. This negative impact is set to slow sluggish demand in the for-sale market even further.

On the other hand, people who cannot afford to buy their first home will be forced to remain in the rental market, thereby increasing demand for rental units, concludes the report.

Young and old live alone

Otherwise, the growing number of student housing transactions stands out in stark relief to the weak activity across most of the European housing market. During a crisis, people typically spend longer in education or return to further education to improve their chances in the job market, explains Marcus. “Demand for student housing is currently increasing while supply is still catching up,” he states. “Student housing is one of the few segments to perform extremely well amid an overall challenging economic environment.”

Simultaneously, demographic developments – namely, an ageing population coupled with declining average household sizes – are also leading to a rise in the number of one-person households across Europe. Here, we see a wide divergence in ages. Most single-person households are either for younger individuals in their 20s to 30s or at the other end of the scale, for older people in their 70s or 80s.

“Student housing and co-living are very dynamic markets and therefore an easy play,” Marcus explains. “A lot of investors are also starting to look at senior housing to try and understand the mathematics behind it and what kind of product needs to be created to target this area of the market, such as being located near to medical services.”

“Student housing is one of the few segments to perform extremely well amid an overall challenging economic environment.”

Dr Marcus Cieleback

Irish construction stirs back to life

Looking ahead, urbanisation is here to stay, says Marcus. “Despite the prevalence of mobile working, people still flock to urban areas as places full of opportunities,” he says. “Even with jobs that can be carried out remotely, people are gradually realising the added value of face-to-face meetings and choosing to live and work in urban areas.”

In terms of geography, there is little variance across residential markets throughout Europe. Nevertheless, Ireland stands out as one of the few countries where construction activity is not declining so dramatically as its European neighbours.

Ireland may undeniably possess a troubled residential market, but this rising construction activity should hopefully mitigate future challenges, explains Marcus. “Ireland has benefitted from a lot of recent government activity to promote construction; numerous plots of land have been sold off during the past 3-5 years,” he says. “This is resulting in supply coming into the market. The big question though is what will happen in the next few years when this supply is used up.”

On the up ‘down under’

Within the residential report, PATRIZIA also highlighted some key global developments. This includes the emergence of a burgeoning build-to-rent (BTR) market in Australia, similar to that seen in the UK some 10-12 years ago. Investors are encouraged to take a closer look at this emerging sector due to its attractive fundamentals and predicted dynamic activity over the next few years.

Whether down under or back in Europe, the quality of the location is something that an investor should always take into account. That’s why PATRIZIA is working hard to provide investors with a better understanding of the drivers of rental levels and rental developments.

For example, PATRIZIA’s Amenities Magnet algorithm evaluates the attractiveness of a location based on the supply of amenities relative to the city. In this way, the Amenities Magnet enables investors to understand their chosen location to secure and optimise the income stream and asset management of their portfolio.

Ultimately, worsening financial constraints are clearly weighing heavily on the European residential market and reducing home affordability for many. However, there are pockets of optimism and opportunities to be found in key market sectors, provided that investors know where to look and how to react thanks to expert guidance.