The bull run in the European residential sector that was fueled by low interest rates in the past decade has been coming under strong pressure from ECB rate hikes, with valuations stagnating due to the wide gap in expectations between most buyers and sellers, according to research by property fund Catella.
However, there are now signs of bigger deals being done and a new lower consensus price floor may emerge in the coming months.
Data from the report shows that the average purchase price for a condominium in Europe (all construction years) in Q1 2023 is €5,235 per sqm. The range is from €1,720 per sqm in Lahti to €15,250 per sqm in Geneva.
On monthly rents, the average in the 63 European cities surveyed is currently €17.25 per sqm, 2.5% higher than in Q3 2022.
“The fundamental conditions in the European residential property markets remain intact. However, the more difficult financing conditions are leading to a sharp decline in new building permits and thus the supply of apartments will fall noticeably in the coming months. At the same time, demand remains at a high level, driving up rents and occupancy rates. The social aspects of rental affordability will thus continue to come to the fore in the media and in political arenas around Europe. We expect that yields could stabilise in the second half of the year,” said Dr Lars Vandrei, Senior Research Manager at CRIM.
After a hiatus caused by the sharp increase of interest rates, the first sizeable transactions in residential investment markets are just starting to occur again primarily due to strong pent-up in housing demand in European cities being met by very limited supply, added Prof. Dr Thomas Beyerle, Head of Research Catella Group.
The report further shows that based on current market prices for apartments for rent and an assumed expenditure of 25% of local disposable household income on ‘cold rent’ (not including costs such as utilities and services charges), households in Graz can afford the largest flats. Meanwhile, due to comparatively low incomes, affordable housing in Polish cities is mathematically the smallest.
At the same time, the average European prime yield for apartment buildings is 3.97 %, an increase of 37 basis points compared with Q3 2022. The most attractive prime yields can be found in the Baltic cities of Vilnius at 5.50% (+10 basis points to Q3 2022) and Riga at 5.40% (+5 basis points to Q3 2022), as well as in the Polish cities of Krakow at 5.40% (+15 basis points to Q3 2022) and Wroclaw also at 5.40% (+15 basis points to Q3 2022).
