Europe’s fundamental mismatch between voracious housing demand and the limited supply is driving massive investment growth in the residential sector and will continue to generate opportunities even amid geopolitical and economic uncertainties, according to a new report by Colliers.
Colliers’ latest EMEA: European Living Snapshot finds that residential investment volumes surged 89 percent throughout 2021, and for the first time crossed the 30 percent line as a proportion of real estate investment in Europe. Underlying this growth is what the report describes as “strategic levels of under-supply to meet urban household formation and growth.”
Luke Dawson, Managing Director of Cross Border Capital Markets, commented, “Amid current economic volatility, this long-term imbalance makes the living sector attractive to the capital seeking a defensive, contra cyclical investment with a variety of routes to market. Build-to-rent (BtR), for example, is gaining in popularity due to the limited availability of existing stock, alongside investment into social and affordable housing.”
Another notable hotspot across much of Europe is purpose-built student accommodation (PBSA), particularly around universities with an international reputation that can attract students from near and far. “We’re seeing more activity concentrate on niche areas related to specific demographic factors,” said Damian Harrington, Head of Research, EMEA and Head of Global Capital Markets Research, “PBSA is attracting a lot of interest in markets like Italy, Spain and Central and Eastern Europe.”
One clear trend is that investor interest is expanding well beyond Europe’s largest and most famous urban areas, with lower-tier cities also seeing a notable uptick in activity in 2021. In this respect, the European market is beginning to mirror the US, where residential investment is increasingly targeting smaller cities such as Charleston, Tucson and San Antonio.
“The migration to tier-2 and -3 cities is increasingly evident in Europe’s more mature markets,” said Paddy Allen, National Capital Markets, UK at Colliers, “Places like Gothenburg and Manchester are attracting more attention as investors expand their search for yield.”
The range, scale and strategies for residential investment vary considerably across the globe. In Europe, the strongest growth markets have also been those benefiting from a significant share of residential investment. These include the Nordic cities of Stockholm, Malmo, Gothenburg and Copenhagen. Berlin tops the bill, Barcelona is a fast-moving market, with investment levels flourishing courtesy of an expanding residential sector, as are the likes of Madrid, Helsinki, Manchester and Dublin.
Mega-deal in Germany moves it to pole position
Vonovia’s takeover of Deutsche Wohnen in late 2021 created a housing giant with a portfolio of some 568,000 apartments. This cemented Berlin’s position as the fastest-growing residential investment market in Europe, already supported by Germany’s unusually high ratio of renters to owner-occupiers, and now potentially by an influx of new people seeking housing from Ukraine. Challenges ahead include tougher energy efficiency regulations and rising construction costs.
Strong investor appetite in France curbed by tight supply
France logged €7.4 billion of residential transactions in 2021, up 7 percent from the year before and double the total for 2019. While investor interest is strong, a very low asset turnover rate is limiting activity. One notable trend is the entry into the market of former social housing operators, which are taking sizeable stakes in new housing portfolios under development.
Ireland grapples with the huge housing shortfall
Ireland is facing a housing crisis, with the supply of homes either for sale or for rent at record lows and home price inflation surging in 2021. This has inspired a bulging pipeline of BtR construction, supported by the forward funding or forward sale of units to domestic and international investors. New BtR blocks are exempt from a rise in the rate of stamp duty to 10 percent on the purchase of 10 or more residential units – a recognition of how important such investment is to solving the housing crunch.
Students and young renters key to Italy’s market
Italy is experiencing strong residential investment in cities with renowned universities, such as Bologna, and those with a large population of educated young professionals and high employment, such as Milan. Investors are entering a market that has traditionally been dominated by owner-occupiers and small private landlords; building better-quality housing stock offers an opportunity, but construction costs are rising sharply.
BtR shows strength in the UK
Over 14,500 BtR units were completed in 2021 in the UK, up 24 percent from the year before, while investment climbed 33 percent to a record €5.6 billion. The growth has led to fears over the possibility of oversupply. However, evidence from Manchester, the UK’s most mature BtR market, suggests otherwise, with rental inflation rates there among the highest in the country. BtR currently only accounts for 9 percent of total investment volumes into direct real estate in the UK, compared to 35 percent in the US, making investment saturation unlikely anytime soon.