Choosing where to live is a big decision for most people. It’s never just about location. Cost, accessibility, amenities and space for the TV or the vegetable patch are just some of the issues people may consider. One of the most important factors is whether to rent or to buy.
In most of continental Europe and increasingly in the UK, renting is a way of life. A lack of affordability has forced many into long-term renting, but lifestyle choices and increased mobility often make renting far more appealing than buying.
The growing demand for renting in this region illustrates the greater opportunities investors have to diversify out of traditional commercial property sectors and into residential assets. Residential can offer a secure income stream, minimal vacancy risk and the potential for long-term rental growth.
One of the advantages of the sector is its diversity as there is a wide range of different types of accommodation covering a range of life stages. Private-rented accommodation, student halls, care homes, social housing and serviced apartments provide the main opportunities within the region.
Private-rented residential refers to institutionally-owned accommodation, which is available for rent. This is by far the biggest and most investible residential subsector in Europe. Supply is constrained, and development has not kept up with growing demand in Europe’s winning cities.
Incomes are also very secure and continue to grow. Market characteristics vary considerably, with Germany standing out as the largest investible market in Europe. The Netherlands, Sweden, Switzerland, Denmark, France and, more and more, the UK all offer significant opportunities for investors. Pricing and affordability vary considerably across Europe, between countries and even cities. Rental costs in Germany, for instance, look very affordable relative to income.
Market characteristics vary considerably, with Germany standing out as the largest investible market in Europe.
While Germany dominates the private-rented sector, the UK leads the way in the student halls sector. There is growing demand from international students who are more likely to live in purpose-built halls. Individuals are also increasingly seeking higher education qualifications in order to improve employability. Despite increased demand, we believe the public sector does not have adequate capital to fund as many new developments and to refurbish ageing properties to keep up with growing needs. There is likely to be a substantial need for private investment over the medium-to-long term in order to improve existing assets, replace obsolete properties and provide new accommodation.
Many of the student housing markets in major European countries are still in their infancy but have significant growth potential, particularly in Germany and the Netherlands. Conveniently-located student halls at high-quality universities within supply-constrained cities are particularly attractive.
Care homes is a disaggregated sector across Europe and covers a wide range of facilities, such as senior living, hospices and mental healthcare facilities. The majority of assets are owned by public or not-for-profit organisations, which currently have little incentive to sell. That said, we believe the sector has substantial potential for growth as operators consolidate. Given an ageing population and a lack of government funding, the sector is in desperate need of an injection of capital in order to build new stock and refurbish existing properties.
Estimates suggest there will be an extra 11 million people over the age of 80 by 2030 in Europe, which indicates that a further 21,000 care homes will likely be needed. At the same time, there is a major structural change occurring in the sector, with people typically entering care homes later in life, staying for shorter periods but requiring far more specialist care during their stay. Acute care facilities that deliver high dependency care – services that are essential for the government to provide – offer some of the safest investments. Care homes in undersupplied wealthy regions are also a good option as home owners can use their home to pay for their care.
Social housing has the potential to be an enormous investment market in Europe, although it remains a limited investment opportunity at the moment. This should change in the longer term as there is strong demand for social housing in many countries and governments have little capital to build new homes or refurbish existing ones. In the UK, for example, there are over two million people on the waiting list for social housing. There is demand for seven million subsidized homes in Germany and that was before it received more than one million migrants in 2015. Meanwhile, we believe the Dutch market currently offers the best opportunities as regulatory changes mean that social housing providers will be forced to withdraw from the middle-income, non-regulated market.
Serviced apartments are a niche part of the residential sector. According to our research, the entire serviced apartment sector across Europe is less than a thousandth of the size of the German private residential rental market. The largest locations are London and Paris, but the overall numbers in Europe are considerably lower than in major cities in the U.S. and Asia. As such, there is huge potential for growth. Branded, purpose-built developments are expected to dominate future growth in this sector.
In our view, private-rented residential is by far the most attractive and investible residential subsector. It continues to have very strong demand, constrained supply and a secure income stream. Renting, in many of its various forms, could be here to stay.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments.
Investments in property may carry additional risk of loss due to the nature and volatility of the underlying investments. Real estate investments are relatively illiquid and the ability to vary investments in response to changes in economic and other conditions is limited. Property values can be affected by a number of factors including, inter alia, economic climate, property market conditions, interest rates, and regulation.