It is a basic human right to put a roof over your head and to call it home; after all, home is where the heart is. But not everyone aspires, or is able to aspire, to be a homeowner, and homeownership is not always the optimal solution to a family’s accommodation requirement. Homeownership of a different kind — development of and investment in single-family and multifamily rental housing by institutional investors — is also not for everyone. But — whether homeowner, landlord, tenant, investor or manager — “everyone has to live somewhere,” says Alex Greaves, residential fund manager at M&G Real Estate. “Either owned by themselves or rented from someone else.”
Depending on the market and its culture, regulation and economics, rental housing plays a significant role in Europe’s residential property sector, in both regulated/social and unregulated/private spheres.
Discussion of the role played in a particular market by institutional investment in residential housing has to start with an analysis of homeownership levels in a country and the role of the state, and that is largely a function of culture, the provision by the state of subsidised family housing, the impact of regulation on tenant willingness to rent, the direction of house price movements — no-one likes to put themselves in a negative-equity, money-losing position if the trend is downward — and the general economic situation. Homeownership levels have always been demonstrably higher in some countries and areas than in others; higher in the United Kingdom, for example, than in Germany; lower in Sweden than in Spain; lower in Copenhagen than in Denmark as a whole.
Much of this is to do with the mobility of labour — or, put another way, with retaining the flexibility to move to where the action is, work or play, without being constrained by a house sale/purchase process. Rental housing provides that flexibility for people.
“The attraction today of residential,” says Jaap van der Bijl, head of investor relations at Syntrus Achmea Real Estate & Finance, “is because it is seen as a core investment, very risk-averse and with high returns.” The residential sector in Europe has always been a domestic thing, he says, with markets dominated by local players. “If you want to go into a foreign market, you have to be in a position to acquire properties,” van der Bijl adds. “You either open a subsidiary in the country concerned or you align yourself with a strong local partner. Otherwise it will be difficult to get your hands on the deals.”
Behind but not by much
The question of investor attitudes and sector preference came up in the recent investment intentions survey from INREV, the European Association for Investors in Non-Listed Real Estate Vehicles. In the section that asked about investors’ preferred sectors in Europe, out of the five sectors listed — office, retail, industrial/logistics, residential and other — residential came fourth.
That might imply that resi is out of favour, but actually 52 percent of INREV’s survey respondents plumped for the sector, so it simply means that resi is less favoured than office, retail and industrial/logistics. Retail came top, with 82 percent, and office second, with 75 percent. Intention is not necessarily doing, but it is indicative of sentiment — and a response where more than half of respondents opt for residential has to be seen as a positive sentiment!
“It’s the risk basis,” Greaves says. “Residential is just a completely different type of investment. It’s diversified. It has lower correlations than big commercial property and a different profile of volatility, based on the type of underlying covenants that you have with the individual people who are renting properties.”
That ranking of preferred sectors, with commercial property sectors ahead of residential, is also what you would expect of institutional investors. Research published last year by the Investment Property Forum in the United Kingdom shows that the UK commercial property market has an overall value of £647 billion (€854 billion) and that £364 billion (€480 billion) of that is investable for institutional investors — or 56 percent. The corresponding figures for the UK private-rented residential property market are £837 billion (€1.10 trillion) and a miserly £18 billion (€23.7 billion) — or just 2 percent.
Andrew Taylor, responsible for UK residential investment at Internos Global Investors, says that the wide disparity between commercial and residential property “provides a significant opportunity to grow institutional investment with professional management in this previously-overlooked market.” It has been overlooked, perhaps, because institutional investors could see that there were issues in the United Kingdom with a lack of scale and the absence of perceived opportunity. But the devil always makes work for idle hands, and that situation is changing now. “Couple this,” Taylor continues, “with a worrying outlook for global equity and fixed-income returns, and the UK residential market provides an attractive proposition for risk-averse, return-hungry investors.”
“I’m not saying that residential is better than commercial,” Greaves adds. “I’m saying it’s a good diversifier alongside commercial property.”
Internos recently formed an alliance with Catalyst for Homes to “explore the formation of a range of direct and indirect investment vehicles that will enable institutions to invest in scale in the UK residential rented market.” The two firms are evaluating 152 residential development sites across Greater London with a view to selecting the most attractive for the institutional market. “Suitable sites are likely to provide a range of characteristics including asset management potential and up to 30-year income returns, which will be attractive to investors allocating from not only real estate, but also infrastructure and fixed-income quotas.”
The weight of capital
The start of the new year sees not only reports from real estate consultants on the development of investment volumes in the year just finished but also previews for the year ahead. Savills, for instance, believes that the weight of capital that continues to be directed to property in Europe — “circa 30 percent above the long-term average” — augurs well for specialist sectors like hotels, student accommodation and residential alongside the traditional core sectors of office, retail and industrial/logistics.
Record low bond markets and volatile equity markets will see a continuation of what the firm calls “real estate mania.” Such is the weight of money and contrasting profile of investors, says Savills, that both risk-averse and risk-embracing buyers will be active, bringing demand for the safest markets and asset classes. “Investors will continue to diversify as pricing competition in the prime sector encourages them to consider other markets,” says Marcus Lemli, head of European investment at Savills. Deflation of the kind that we are now seeing across Europe, if it becomes entrenched, will affect confidence and could potentially redirect investors to bond-like assets with longer income streams. That is beneficial for residential.
Equally, the Partners Group market outlook for 2015 likes Scandinavian residential. The three capital cities of Stockholm, Copenhagen and Oslo are all seeing population growth due to urbanisation and immigration. Partners Group believes that “the stability of the Danish economy combined with the urbanisation trend and the scarcity of owner-occupier stock makes the Danish residential market stand out as a highly-attractive environment in which to pursue multifamily acquisitions.” Copenhagen, where the homeownership rate is just 18 percent compared to 51 percent for Denmark as a whole and where apartments make up 90 percent of the residential stock, is a particular target.
Copenhagen is also a good example of the impact of regulation. 82 percent of the city’s apartments were built before 1964, Partners points out. “The date of original construction is significant, as properties built before 1966 are legally disqualified from conversion into common-hold units for sale to owner-occupiers.”
Marked differences between markets
Investors cannot approach residential investment in a pan-European way. Every country, every resi market is different and requires a different approach. The Netherlands, for example, has gone through a period of regulatory liberalisation, which has released social housing for redevelopment and reallocation to free-market private rental housing, while in Germany the advent of the current Grand Coalition between the CDU/CSU and SPD coalition partners has seen moves to strengthen tenant rights.
Bouwinvest, the real estate manager that is owned and co-invested in by bpfBOUW, the Dutch Construction Workers’ Pension Fund (so it should know something about housing), recently received new mandates totalling €92.5 million from four Dutch pension schemes for its €2.6 billion Dutch Residential Fund. Dick van Hal, CEO of Bouwinvest, comments: “This reflects both the quality of the assets in the fund — where we target a 6.0 percent return for a very low risk — and a sea change in investors’ perception toward the residential market in the Netherlands. House prices have turned a corner after five years of decline, and moves by the Dutch government to liberalise the rental market are providing a more level playing field for investors.”
Van Hal adds that there is a shortage of stock in the free-rented sector in the Netherlands, “especially in the strong regions.” Changes in government subsidies and tax concessions will see people move out of social housing, van Hal says, “and they will switch to the private-rented sector. They could also opt for owner-occupation but that comes with a risk.”
Bouwinvest put €400 million into Dutch private-rented housing in 2014 and expects to invest a further €200 million to €300 million this year. Why? Quite simple, says van Hal: “The best return from Dutch government bonds is 0.5 percent, and dividend income from residential is 4.0 percent.”
Stronger tenant rights in Germany, particularly on rental increases, has not seen any diminution of investor interest in German residential, long seen as the strongest European market; far from it, as urbanisation into the major cities there coupled with a lack of supply has seen the announcement of numerous development schemes, particularly in Berlin, and substantial transaction activity by motivated investors in both listed and unlisted residential property companies and funds.
In the United Kingdom, a new, higher demand for private rental housing — due primarily to house prices and deposit requirements in parts of the country being largely out of reach to first-time buyers as well as to a lower availability of mortgage finance caused by tighter regulation — and a perception among institutional investors that previous issues of lack of scale are slowly being addressed has seen starts in the recent past on a number of new residential developments. It’s the usual story — someone takes the plunge and kicks things off, and others follow. “We need to let this mature,” M&G’s Greaves comments.
A recent example was the forward purchase by GRIP Unit Trust, the market-let UK residential property fund owned by APG and Grainger Plc, of a new 8,360-square-metre build-to-rent scheme in London’s Canning Town district from BY Development Ltd for £33.25 million (€43.9 million). The scheme is part of the mixed-use Hallsville Quarter regeneration project that Bouygues Development Ltd is carrying out together with the London Borough of Newham. The 16-storey residential tower will provide 134 one- and two-bedroom apartments together with car parking spaces and resident amenity space. Lease terms will restrict use to private-rented accommodation for the first eight years. Construction began in January, with completion expected in summer 2017.
Converting by example
One way of dealing with a housing supply/demand problem anywhere, apart from building from scratch on greenfield and brownfield sites such as the former coal mine pictured at the beginning of this article, is for developers to convert unwanted or obsolete commercial property into residential units, for purchase by individuals or corporate investors, for owner-occupation or for rent.
Legal & General Property, for example, recently sold 31–33 Bedford Street in London’s Covent Garden district, a mixed-use property overlooking St Paul’s Church Gardens that has planning permission for conversion of the office space into 12 residential apartments, to Capital & Counties Properties for £32 million (€42.2 million). The property is one of 10 buildings in an LGP Covent Garden portfolio acquired from ING in December 2009 that have received planning consent for office-to-residential conversion.
In some European cities, this office-to-residential movement has taken off so strongly that concerns have been expressed about the eventual possible detrimental impact on the availability of office space. Other concerns relate to the high proportion of these office conversions that have been turned into luxury apartment blocks — London is a good example — and that actually do little to address the acute housing supply/demand imbalance that exists locally at the lower end of the market. Without even discussing the discontent that can build up among aspiring, upwardly-mobile resident populations when they see foreign buyers acquire expensive safe-haven prime properties in prestigious locations, whether conversions or newbuilds, and leave those properties empty for much of the year … London again.
“There’s something in that,” Greaves agrees, “but London is a globally attractive city that international investors want to come and live in. It’s about the instability of other countries and the stability of ours. We have a transparent government, a stable economy and a stable currency. London is an attractive place to be; we should be proud of that.”
There is a fine line, though, between the provision of living space for people and of business space for public and private companies — and presumably society wants businesses to offer employment, people who live within a reasonable distance to take up those jobs, both to feel that they have come to a mutually-beneficial arrangement, and for both thereby to contribute to the overall economic, environmental and cultural wellbeing of a location.
All you need then alongside the residential housing is the usual cornucopia of office and retail establishments and places to make and store the goods that people and businesses need, and there you have it — a real estate universe on the doorstep.