Institutional investors in Europe face a housing supply problem – but America has already found the solutions
Despite the trauma of the 2008 global financial crisis, real estate has experienced astonishing growth as an asset class. More recently, covid-19 has triggered a move to residential strategies that can provide stabilised rental income at scale while embracing trend shifts towards suburban living and a better work-life balance.
Today, due to a buoyant market – with the total value of all global real estate estimated at $228tn – investor appetite remains strong. However, the largest proportion of this stock represents privately owned residential property that has not been accessible for institutional investment, and the supply of assets is at an all-time low. So, how does Europe solve a problem like lack of supply?
Europe has seen dramatic growth in multi-family housing (MFH) investments in recent years, a pioneering trend from the US to fill demand caused by urbanisation in major cities. Multi-family has been the most traded American real estate asset class for the past three years, creating stiff competition and forcing US-based investors to look to Europe for opportunities.
European affordability levels and higher deposit levels required for first-time buyers have made renting more widespread in Europe than in many US cities. UK property prices would need to fall by 37% on average to make home ownership affordable for a single person on an average income. Build-to-rent is a recent strategy designed to fulfil demand for purpose-built income-producing assets by building homes for private rental.
After five years of robust investment flows, MFH has now moved from being an alternative route to becoming a core and trusted strategy that is protected by rental income stability and the scarce supply of operational assets. Most MFH or BTR assets are so prohibitively expensive via secondary trades that they now require investors to acquire in primary, through forward funding with exposure to development risks, geographical concentration risk and a long period without any income generation against capital deployment. More recent MFH projects occupy lower-quality locations with lower rental yields, in a covid era where residential density is seen as a potential public health issue rather than a convenience.