Residential Investment Market in Europe Eri Mitsostergiou – European Research
Residential Investment Market in Europe
Eri Mitsostergiou – European Research
European Residential Investment agenda
The sectors The drivers The prospects The hotspots
2
The ‘fourth’ sector?
The rising importance of Alternatives and the Residential sector
3
1
Alternatives are becoming mainstream…
4Savills
Why?
• Diversification
• Better returns
• Lower volatility
• Good fundamentals
• Stable long-term income
• From a quarter to a third
of total activity
24%27%
23%
29%31% 31%
34%32%
29%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
50
100
150
200
250
300
350
400
450
2009 2010 2011 2012 2013 2014 2015 2016 2017 H1
Bill
ion
s
Investment share in Alternatives
Alternatives Total Investment Share of Alternatives
…driven by the residential sector
5Savills
What is residential?
• Family housing
• Student housing
• Senior housing
• And other emerging
concepts (multi-, co-
, micro- …)
48%
50%
57%
67%
63%
45%
45%
[VALU
E]%
60%
0
20
40
60
80
100
120
2009 2010 2011 2012 2013 2014 2015 2016 2017 H1
Bill
ion
s
Residential share of Alternatives
Residential Investment Other
Over 80% of capital only in four markets
6Savills
Where to?
• Germany, Sweden and
Netherlands have
established institutional
residential markets
• UK has established student
housing sector
2%4%
5%
5%
9%
9%
17%
46%
Residential investment destination 2009-2017
Poland
Norway
Italy
Ireland
Austria
Spain
Finland
Denmark
France
Netherlands
UK
Sweden
Germany
Over 70% of capital only from four countries
7RCA
Where from?
• Over one third has been
cross border investment
• US investors expanding
outside their home market
• European investors
focusing on their home
markets and increasingly
going cross border
38%
12%9%
13%
3%
6%
9%
4%4% 2%
Residential investors by origin 2009-2017 United States
United Kingdom
France
Sweden
Singapore
Germany
Canada
China
Luxembourg
Belgium
The drivers
What drives investor demand for residential?
8
2
Urbanisation and demographics
9
Structural rather than cyclical
Source: Oxford Economics
• People move in the big
cities – apartments
• Ageing population –
senior housing
• Shrinking household size
– micro living
• Rising student population
– student housing
Student housing – Increased student mobility and low supply of quality stock
10Savills
Student housing supply ratios
• Rising student and
international student
numbers
• Rising number of ETPs
Multifamily – House prices are rising and renting is becoming appealing…
11
Rent vs Household Income
Source: Oxford Economics, OECD
• House prices have been
rising by 4.1% pa on
average over the past
five years
• Affordability issues are
pushing people
(especially younger ones)
to the rental market
22.4
%
30.2
%
22.6
%
32.1
%
25%
22.1
%
19.8
%
30.5
%
30.9
%
38.2
%
28.8
%
29.2
%
23.1
%
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Germ
any
Neth
erl
ands
Fra
nce
Spain
Italy
Austr
ia
Irela
nd
Sw
eden
Fin
land
Norw
ay
Denm
ark
UK
Port
ugal
Share of Rent from Disposable Income (2016)
Average Household Disposable Income (2016)
House price index 2017 (r-h-axis)
…still low ratio in most countries so there is scope for increase
12
Current Stock
Source: Housing Europe, Euroconstruct
• In the US market
equilibrium is considered
when 30% of the
population is renting
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fin
land
Spain
Port
ugal
Italy
Irela
nd
UK
Fra
nce
Austr
ia
Sw
eden
Neth
erl
and
s
De
nm
ark
Germ
any
PRS Stock / Population (2015) Tenants at market prices (r-h)
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Germ
any
Neth
erlands
Fra
nce
Spain
Italy
Austr
ia
Irela
nd
Sw
eden
Fin
land
Norw
ay
Denm
ark
UK
Port
ugal
Average Capital Growth (2006-2015) Average Rental Growth (2006-2015)
Residential markets have delivered attractive returns
13
Multifamily Capital and
Rental Growth
Source: IPD
• Rental growth has been
the largest in
Denmark, Finland and
Austria, while rents
declined in Spain and
Portugal.
Residential yields have been compressing over the past five years…
14
Multifamily Yields
Source: Savills
• Multifamily yields have
compressed significantly
over the past five years
• The only exception is
London as we have seen
a softening of yields this
year
-0.0200
-0.0150
-0.0100
-0.0050
0.0000
0.0050
0.0100
0.0150
Am
ste
rdam
Du
blin
Berlin
Co
pe
nh
age
n
Ham
burg
He
lsin
ki
Lo
nd
on
Munic
h
Sto
ckholm
Vie
nna*
2012-2017 multifamily yield compression
…but still offer a good spread over long term interest rates
15
Multifamily Yields H1 2017
Source: Savills
• Only in Helsinki, Madrid
and London multifamily
yields are higher than
offices
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Sto
ckholm
Berlin
Paris
Oslo
Am
ste
rdam
London
Madrid
Copenhagen
Dub
lin
Hels
inki
Net Multifamily vs. Net Office Yields Net Multifamily vs. Bond Yields
Prime Net Multifamily Yields
The prospects
Is residential going to continue to perform?
3
Investor demand should remain strong
17RCA
Potential market size
• Residential investment
volumes in the US are four
times larger, while
population is almost a third
lower
Some further yield compression is possible…
18
Prime net Multifamily Yields
Source: Savills
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2010 2011 2012 2013 2014 2015 2016 2017
Amsterdam Dublin Berlin
Copenhagen Hamburg Helsinki
London Stockholm Vienna*
…although interest rate hikes might limit it
19
Long term interest rates
Source: Oxford Economics
• Low interest rates due to
stay low for at least
another year
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
10-Yr Bond Yield (weighted Euro avg. %, eop)
Rental growth will be at least in line with inflation
20Savills
Multifamily rental growth
• Residential sector rental
growth is indexed linked
protecting real income
from inflation
-15%
-10%
-5%
0%
5%
10%
15%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Average prime multifamily rental growth
Inflation projection
The hotspots
Which are the most attractive markets for residential?
4
Capital MarketsDemographics
We scored the markets based on the following criteria…
22
Spread between Multifamily and Office Yields
Spread between Multifamily and Bond Yields
Prime Multifamily Yields
Residential Investment Volume
Rental Growth
Capital Growth
GDP
GDP per Capita
Consumer Spending
Unemployment
House Price Index
Residential Stock / Population
PRS Stock / Population
Number of Completions
Tenants at Market Price Rent
Total Population
Urbanisation growth
Average Household Size
Average Household Disposable Income
Price to Income
Share of High Income Households in PRS
Share of Rent from Disposable Income
Market ConditionsEconomics
Hotspots per category - Economics
23Oxford Economics
Economic growth prospects
• Which countries will see
the highest economic
expansion
• Unemployment
conditions
• Consumer spending
growth
• Affluent countries
Hotspots per category - Demographics
24Savills
Urbanisation is the driver
• Population growth in the
largest cities
• Shrinking household sizes
• Affordability
Hotspots per category – Market conditions
25Savills
Demand vs supply
• Supply of residential
stock
• Development trends
• Demand for rental
Hotspots per category – Capital markets
26Savills
The most liquid markets
• Size of investment
market
• Spread of yields over
bonds and traditional
sectors
• Capital and rental growth
The combined results
27Savills
Multifamily benchmark
*Size of bubble is 2016 multifamily investment volume
• The established markets
have further growth
potential
• Opportunities can be
found in smaller
markets, some of them
are quite dynamic
Portugal
Finland Germany
Austria
Denmark
UK
Italy
Spain
France
Netherlands
Norway
Sweden
Ireland
15
17
19
21
23
25
27
29
31
33
35
10 15 20 25 30 35 40 45
Mark
et conditio
ns
Demand drivers
Small but dynamic
Established
and
growing
Developing with
opportunities
The growing cities
28Oxford Economics
Population and Economics
• Growing cities include a
mix of capitals as well as
second tier cities
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0%
5%
10%
15%
20%
25%
30%
35%
40%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
2016-2
6 G
DP
incre
ase
2016-26 Population increase
Summary
29
Investment in residential will be increasingly a strategic choice for investors:
• Supporting demographic trends and growth potential of the market
• Diversification benefits
• Higher yields (although compressing)
• Indexed rental uplifts
• Long leases
• But less transparency and maturity and lack of performance index
Look for the cities
• With growing population
• With growing employment opportunities
• With growing student numbers
• With good infrastructure
• With good quality of life
But keep in mind that each jurisdiction is different
• Lease structures
• Rental regulations
• Local demand and supply characteristics
• Planning
Thank you
30