Despite rising costs and rents, the rented residential sector continues to ride high as demand booms and is poised to remain a more lucrative investment opportunity than asset classes such as office or retail. Bonard has spoken to leading real estate specialists to investigate the factors behind the sector’s success.
“The demand for rented residential has never been greater than it is today,” says Joe Persechino, Head of Residential & Student Accommodation at AXA Investment Managers.
The picture painted by Persechino and other key sector players interviewed by Bonard gives a good idea of why rented residential is an attractive asset class for institutional investors and why it will continue to be in the future. “The residential for rent sector remains a key area of focus, allowing us to provide much-needed housing by bringing forward safe, secure and modern affordable homes, whilst providing our clients with stable income returns to meet their own liabilities.” Persechino continues. “Homeownership continues to be a challenging aspiration with younger people much more likely to rent than the previous generations.”
Demand for rental properties continues to grow across Europe, and the rented residential sector is recording higher prime yields than other traditional real estate asset classes. These conditions are making rented residential much more attractive to investors than other real estate sectors, such as retail and offices.
Despite the significant differences in income levels, regulations, inflation and interest rates across European countries, the rented residential sector shows the same characteristics everywhere: a healthy level of demand, resilience against the economic crisis, growing rents and high occupancy rates.
“Capital fundamentally believes in the residential asset class. We see big opportunities in this sector, and it is worthwhile investing even in such turbulent times,” observes Julia Momotiuk, Rented Residential Director at Bonard.
“Given its proven resilience, rented residential is becoming more and more attractive for investment funds all over the world.” Institutional investors are also eager to get involved in the sector, adds Stephan Schanz, Senior Real Estate Analyst at abrdn. “Now, more and more institutional investors are increasing the share of alternative residential asset classes in their portfolios. There is a growing interest in this sector and it will continue to strengthen,” he explains. Large international institutional investors, in particular pension funds, are looking to allocate capital to rented residential. The availability of capital continues to grow, especially in countries with large young populations (USA, Australia, Canada), thanks to the net inflow in pension funds.
Rising rents are not dampening demand
Naturally, and despite its positive outlook, the rented residential sector is not immune to the effects of the current economic situation. However, while operators and developers are facing their fair share of challenges, the sector is still experiencing high demand levels and recording higher prime yields than other traditional real estate asset classes.
Rising inflation and interest rates, skyrocketing energy prices and political instability have put pressure on financing, construction, staffing and utility costs. Construction costs, for example, were up by 20–40% in August 2022 compared to 2021.
Rising costs and increased pressure on margins have dampened some investors’ enthusiasm and led operators to increase rents. However, while rents have been rising by 3–7% in Western Europe and as much as 10–15% in Eastern European countries, the level of demand has not been negatively affected – possibly due to a relative shortage of suitable accommodation solutions on the market.
Momotiuk explains: “It is fair to conclude that the sensitivity of demand of rented residential to growing rents is much weaker than in traditional sectors such as hotels, retail or logistics. “This means that, despite growing costs and compressing yields, investments in rented residential are still very attractive.”
Russell Petrie, Head of Student at EQT Exeter, adds: “The observed increase of rent levels in rented residential is underpinned by a shortage of stock on the market amid growing demand, rather than rising costs. We expect the rented residential asset class will continue to show a rise in rents in the mid-term across Europe for this reason.”
What is keeping the level of demand for rented residential so strong? “There are several factors at play,” Momotiuk explains. “Demographic and social changes, coupled with economic pressure, are making renting more attractive and more affordable than buying for younger generations.”
A generation of renters
It is undeniable that, for younger generations across Europe, buying a property has become a less conventional life milestone than it was the past.
“The majority of young people consider renting as more convenient than owning now. Renting is a better fit for a generation that is highly mobile and prefers investing in education and technology rather than in a property.” Brian Welsh, Managing Director at Round Hill Capital, says. “Also, fundamental socio-demographic changes such as later marriage and birth of kids and earlier divorcing contribute a lot to the choice of the population regarding living style, particularly renting or owning accommodation.”
Currently, 30% of Europeans are renters, with significant differences across countries: while in Switzerland almost 58% of residents rent a property, in Romania the share drops to 5%. Thirty percent of Europeans are renters and their share will keep growing Other countries with a higher than average proportion of renters include Germany, Denmark, Austria, France, Sweden, Netherlands, the UK and Finland. But industry leaders expect the share of renters to rise in the future, especially across Eastern Europe.
“I would expect the share of renters to go up to 60% in Germany and The Netherlands in the next decade. At the same time, the share of renters in Eastern European countries will grow faster than in Western Europe due to the change in economic fundamentals and less affordable housing,” explains Rainer Nonnengaesser, Executive Chairman of International Campus Group.
Stephen Young, Senior Investment Manager at Kajima Europe, adds: “Socio-economic fundamentals are changing fast, pushing the demand for renting, and this trend is very likely to stay. We expect the share of renters in Poland to rise to 30–40% in the long run.”
Urbanisation and late marriage
Certain social and demographic shifts are influencing young people’s choices when it comes to accommodation.
One is urbanisation. In 2021, three in four Europeans lived in an urban area – an increase from 69% in 1990. In some countries, such as Sweden, the share of city dwellers reached 88%.
Another trend concerns the age of first marriage: across Europe, it is clear that people are choosing to get married later. For example, while 30 years ago 73% of Germans got married between the ages of 21 and 30 and only 21% did so later, in 2021 the majority got married aged 31–40, and the share of those tying the knot earlier dropped to 41%.
Another shift taking place, possibly linked to the rising age of first marriage, is that more Europeans are choosing to live alone. In 2021, the proportion of single-person households stood at 42.3% in Germany and 38.5% in the Netherlands, up from 40.2% and 36.1%, respectively, in 2010. As more people live alone, the demand for smaller rental units rather than larger apartments or family homes continues to grow.
Urbanization, higher mobility, later marriage, and a growing share of single-person households are contributing to the increase in the number of renters.
Renting is more affordable than buying
But the younger generation’s preference for renting is not just caused by demographic and social shifts. For many young people, it has become more difficult to buy a property; this is a long-term trend that has been exacerbated by current economic conditions.
On average, house prices have been soaring across Europe: according to Eurostat, house prices in the first quarter of 2022 were 45% higher than in 2010 – while rents increased by only 17%. Rising interest rates and costlier mortgages mean property is less affordable.
Against this backdrop, spiralling inflation and rising interest rates are now pushing even more people out of the property market.
Across Europe, interest rates have been growing over the past year. On average, they rose to 0.5% to tame inflation, but there are significant differences across countries: for example, in August 2022, interest rates stood at 0.75% in Sweden, but in Hungary, they were as high as 10.75%.
And while interest rates are making mortgage repayments higher, spiralling inflation is negatively impacting purchasing power.
In the Eurozone, inflation reached 8.9% in July 2022, with some important differences – France was at 6.1%, while the Czech Republic reported a rate of 17.5%. All these factors will keep demand for rented residential high for the foreseeable future.
“I believe people will rent more in the future. There are strong fundamentals behind this shift,” concludes Nikolas Hesse, Junior Fund Manager at Catella Residential Investment Management.
“Healthy demand, resiliency to the crisis, the anticyclical nature of the sector, growing rents, and high occupancy rates all indicate the strength of rented residential as an investment.” Julia Momotiuk adds.
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