European Residential Markets 2022/2023

After 2.5 years of pandemic and Russia’s invasion of Ukraine, the fundamentals of the European rental housing markets appear to be almost unchanged, and in some cases even strengthened, which points to the sector’s resilience. Urbanisation and demographics are still driving housing demand, while rising house prices and interest rates are inspiring more households to rent instead of buying. This is supported by a shift in attitudes and growing preferences towards renting.

2021 saw a strong bounce back in market performance almost exclusively driven by capital growth. At the same time, residential NOI continued to outperform the commercial sectors, which points to residential’s stability and resilience. With more and more European markets developing a functioning rental market that is suitable for investment, funds targeting this sector have not only grown by number and size but have also outperformed most of their single sector peers in the past years. Going forward, investors should expect to see a change in the return composition towards more income-driven returns, which will be less volatile.

Supply chain issues, which continue to put pressure on construction costs, and rising interest rates are currently the major challenges for the construction sector. Overall, this limits provision of enough new supply, especially for lower and medium income households, which has been increasingly fuelling discussions of affordability. Given the time needed to create new supply, many governments are shifting their focus to regulating the rental markets, even if doing so only addresses the symptoms instead of solving the problem. One needs to weigh the expected (mostly short-term) benefits of such measures against longer-term drawbacks, including a decline in rental supply.

Looking at effects of steeply rising interest rates in a high inflationary environment from the perspective of an institutional investor in multifamily housing, things look a lot better than the headlines would suggest. Although this is having a negative impact on financing conditions, a trend that becomes quite evident if we look at activity patterns on the listed residential sector in Europe in the first half of 2022, the rental market’s fundamentals, especially supply side, continue to be supported as more households will be looking to rent.