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October 19, 2015

Institutional money is set to pour into the residential property sector in Europe, driven by strong demand from ‘generation rent’

Multifamily investment is big business in America. Popular among private equity and pension funds, it’s one of the most stable investment opportunities as it offers some of the best returns in American real estate: last year saw record breaking volumes of US$110 billion, topping the 2007 peak.

Put simply, it’s the business of investing in apartment blocks but the term ‘multifamily’ hasn’t made it into the mainstream financial vernacular in Europe; it’s better described as ‘buy-to-rent’ and it’s fledgling in comparison.

In the UK – and some countries on the continent, including France and Spain – residential properties remain largely privately held and development of investment-grade apartments has failed to keep pace with demand.

“The London story, and the UK story generally, is pretty unique in that we don’t have an institutional quality residential asset class yet,” says Adam Challis, Head of Residential Research, JLL. “But investors recognise the opportunities.”

As much as GBP10 billion in fresh capital could target new opportunities in the private rented sector over the next five years, according to the 2014 JLL Alternative Investment attitudes survey, with capital flow from all over the world especially, Asia Pacific and North America, looking to access this new asset class.

Rising returns in the residential sector is underpinned by ever-growing demand from ‘generation rent’ – would-be homebuyers who find themselves renting for longer as a result of rising house prices and constraints on mortgage lending.

In a recent article in The Economist, Challis said that GBP2 billion of institutional money already exists in the UK alone and this could double in the next three years as more capital chases the promising yields on offer.

“It’s a fascinating range of investors looking at the sector,” he said. “Some of the first movers have been international but you’ve got a really interesting dynamic at the moment where we see international groups, domestic investors and private equity money getting comfortable with residential, as well as the traditional pension funds looking to get access.”

Build to rent

But before these investors can buy, the properties must be built.

Multifamily typically means large built-to-suit apartment blocks, often with facilities such as gyms and concierge service, yet European apartments are generally smaller scale, older and the quality varies wildly across the continent.

“In order to realise this opportunity we need to physically create that asset class,” adds Challis, “So ‘build to rent’ is about building the assets that represent that mature, stabilised, strong cash generative property.”

That’s certainly the case in the UK, Spain and France. In places like Germany and the Netherlands, the multifamily market is more mature.

Demand for development and new-build investments in the major German cities remains robust with EUR €340 million invested in the first quarter of 2015. Similarly in the Netherlands, residential investment volumes hit EUR €710 million, which is a 189 percent increase year-on-year and Sweden’s residential sector also continues to perform well.

Other international real estate markets undoubtedly lag behind, hampered by skills shortages and soaring demand, but new apartments are beginning to materialise. The first multifamily style assets in the UK will complete later this year, marking a watershed moment in the evolution of the sector in Britain and more are set to come out of the ground over the next 12-18 months.

Ultimately, more money entering the sector at the development stage can only mean a better lifestyle for tenants.

For example, if the toilet breaks, a team is on-hand to oversee repair works thanks to the professional management team that comes with most modern apartment buildings.

“While we’re talking about the real estate and the return profile, what it means for your average tenant is probably a better quality of life full stop,” said Challis.

He added: “With investor attitudes to residential property continuing to improve, the longer-term prospects for a European-style multifamily asset class looks strong.”

Adam Challis
Head of Residential Research, U.K.

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