Originally published May 2021.
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.
Outside major cities, the US housing market is dominated by single-family homes; after the global financial crisis in 2008-09 housing affordability and home-building declined significantly, spurring the growth of a new real estate asset class – single-family rental or SFR. Over the next decade, institutional real estate asset managers including Blackstone and Amherst Capital went on to create multibillion-dollar portfolios of single-family homes to privately rent out to families, with the objective of long-term income streams, capital growth and a superior rental experience.
Demand for SFR has been steadily increasing due to demographic shifts related to Generation Y and Baby Boomers; migration patterns caused by covid-19 have now accelerated that demand. US SFR growth is expected to outpace multi-family, office, retail, storage and hospitality growth by 2022. As the demand for SFR properties increases, a rising number of larger investors are expanding their investment strategy to include this product.
Ten years on, history is repeating itself, as many new US institutional investors see single-family rental as the best way to access residential at scale and yield. According to new research by Zillow, the total value of every home in the US is $33.6tn, nearly as much as the GDP of the two largest global economies combined – the US ($20.5tn) and China ($13.6tn) – but the institutional SFR market in the US is estimated at $3.4tn, compared with $3.5tn for the multi-family market.
Institutions are ramping up on SFR; JP Morgan increased its investment in American Homes for Rent, which operates 50,000 homes, to €650m. Canadian pension giant PSP Investments has become the latest institutional investor to bet on SFR, forging a $700m joint venture with Pretium, the second-largest US owner-operator. In 2019, Global City Development partnered with alternative investment firm Leste to launch Cassa Life, a $2.5bn SFR platform.
In contrast with the US, Europe remains a fragmented real estate market with unique national characteristics and regulations. With house price affordability at historic lows, the region continues to see a rise in renting in both urban and increasingly suburban locations; even top earners are having to save for longer to afford deposits and meet affordability criteria to buy their first home.
“The explosion of BTR in Europe means investors are waiting up to five years for income and are exposed to both concentration risk and development risk within a fast-moving macro environment”
Top German cities now have 80% renters and a generation comfortable with long-term rent. In the UK, where the home-owning dream has for generations been seen as a right, the number of renters now almost exceeds the number of mortgaged home-owners.
EU residential housing stock is estimated to be a similar size to that of the US, at €30tn, but with a SFR market of less than €1tn, pointing to significant capacity for growth.
Prior to the covid crisis, investors viewed maintaining portfolios of scattered rental properties as inefficient, preferring to invest in MFH buildings. AI fuelled by the masses of regional data now makes it possible to identify scattered apartments or housing in order to acquire them to assemble large, income-generating portfolios. Technology and human hybrid models can drive operational efficiency in managing SFR portfolios, with leakage in line with or better than MFH.
The explosion of BTR in Europe means investors are waiting up to five years for income and are exposed to both concentration risk and development risk within a fast-moving macro environment. For the first time, institutional real estate demand can be met through the consumer residential secondary real estate market, which reduces the carbon footprint of each portfolio.
IMMO Capital in Europe has built Europe’s first data-driven SFR platform, which aggregates data from disparate data sources across the entire value chain to connect institutional demand with consumer liquidity. For example, for one portfolio in prime Hamburg, IMMO Capital evaluated more than 20,000 available properties in prime locations, at a value of €2.3bn, with the aim of acquiring around 100 properties for a single-family residential portfolio generating stabilised income and IRR of 30% after 18 months.
SFR is now drawing the attention of institutional real estate investors who are seeking new operating partners and investment managers to grow their SFR platforms.
