Operational residential investment (which comprises multifamily, student housing and senior living assets) accounted for 27 percent of global real estate investment in the first three quarters of 2020, up from just 16 percent a decade ago.
The sector’s resilience and strong fundamentals hold true in today’s challenging macro environment, with demographic trends and affordability constraints continuing to drive demand for rental accommodation. While residential investment volumes in the first three quarters of this year were down 31 percent, it was the least dramatic fall among property types, alongside logistics (down 16 percent). By comparison, office and retail were down 37 percent and 38 percent, respectively, when benchmarked with the same period in 2019.
The figures come after a record year in 2019 when a total of $297 billion was invested into the sector.
Paul Tostevin, director, world research, at Savills, commented, “Even with wider global uncertainty as a result of COVID-19, the operational residential sector has held up better than some others this year. Investment activity has largely been driven by the consolidation of companies across subsectors including multifamily and student housing. Despite the near-term effects of the pandemic from a macroeconomic point-of-view, the longer-term growth in capital volumes targeting operational residential assets speaks for itself. Investors are not only seeking to diversify their real estate portfolios, but are looking for those stable income-streams for which the sector has become so renowned.”
The report shows cross-border investment into the operational residential sectors has also grown, now standing at $46 billion from fourth quarter 2019 to third quarter 2020 and accounting for 22 percent of total investment into residential. This is up from the 14 percent that cross-border deals accounted for in 2016.
Multifamily is by far the largest of the global residential sub-sectors, and 2019 was the most successful year to-date for multifamily assets, with $223 billion traded. Of this total, 71 percent was in the United States, the largest and most mature market, followed by Western Europe at 24 percent. As the sector develops outside of the United States, the Western European (including the United Kingdom) share increased to 27 percent in the first three quarters of 2020. Germany was once again the largest market in Western Europe, with €15.6 billion ($18.5 billion) of transactions in the first three quarters of 2020 according to Savills data.
Student housing also proved its resilience despite the headwinds brought about by COVID-19 and, as a result, the effects of disrupted school and university terms. In terms of active investors, Blackstone was once again a dominant force; the firm’s private equity fund purchased iQ Student Accommodation for £4.7 billion ($6.2 billion), which was the largest ever private property deal in the United Kingdom. Similar to multifamily, consolidation has been a key driver in the student housing sector: in the United Kingdom, Unite Students REIT purchased Liberty Living from the Canadian Pension Plan Investment Board for a reported $1.8 billion.
And 2019 was also a record year for senior living investment globally, with investment volumes reaching $21.4 billion. Despite figures so far this year remaining subdued to-date (69 percent below 2019 volumes), Western Europe’s share of total investment (excluding the United Kingdom) increased to 20 percent (first quarter-third quarter 2020) up from 15 percent for 2019.
Marcus Roberts, head of European investment and development, operational capital markets, Savills, added, “2020 has seen some truly impressive transactions in the operational residential sector, cementing it as one of the most favorable asset classes. With the long-term picture showing an uptick in global mobility, we expect significant opportunities to remain for investors wishing to diversify their real estate portfolios. While there is no shortage of capital targeting the sector, the challenge (and opportunity) in Europe, at least, is finding prime development sites, completed assets or conversion prospects in which to invest.”
With yield compression increasing as the maturity of the sector becomes more apparent, multifamily yields in particular are now stabilizing in most markets following a significant inward yield shift trend during the past five years.
In terms of lending, while there has been an easing in the credit markets, overall the lending market is in a much stronger place compared to the global financial crisis. Lessons learned from the GFC, such as rapid intervention by central banks, have supported liquidity. While banks are now more cautious, non-bank lenders (which are now more prevalent) are willing to take on opportunities with greater risk. Ultimately, residential remains a favorable asset class to lend against, thanks to the sector’s long-term fundamentals.
Source: IREI