North American multi-family investors are being drawn to Europe’s fast-growing sector as they look for opportunities outside their crowded domestic market.
Investment by North American capital in European multifamily rose by 162 percent last year to US$5.2 billion. U.S. investors are now the sector’s second largest source of capital in the continent’s sector after European investors.
Multifamily has been the most traded U.S. real estate asset class for the past three years, creating stiff competition and forcing investors to look elsewhere.
While unleveraged returns are broadly similar at between five and seven percent on both sides on the Atlantic, the less-mature European market is appealing to both heavyweight investment managers such as Starwood Capital – which is investing in Ireland – and major North American pension funds, says Christine Espenshade, managing director of JLL mid-Atlantic multifamily.
“Multifamily has long been a fundamental part of U.S. housing stock and for large institutions, it’s been a fantastic hedge to other real estate asset classes,” she says. “But competition between investors has intensified, leading to something of an arms race on amenities for what is essentially a commodity product.”
Affordability levels for first-time buyers has also played a part in drawing U.S. investor interest. Higher required deposits in European cities such as London has made renting more widespread than in many U.S. cities with lower down-payments.
With that domestic backdrop, major U.S. players are viewing Europe as “one of the world’s major untapped markets,” says Espenshade.
New markets such as the UK have proved particularly attractive. More than US$1.9 billion – nearly 90 percent of all foreign multifamily activity – went to the UK in 2018.
The property arm of Canadian pension fund, Ontario Municipal, purchased a £600 million stake in build-to-rent specialist Get Living in mid-2018. More recently, Canada’s Public Sector Pension Investment Board and QuadReal Property Group partnered with Unibail-Rodamco-Westfield to develop a major London private rented sector scheme.
North American investors are most attracted to European markets in their infancy, explains Philip Wedge-Bernal, Living research associate at JLL.
“Markets where there’s been a lack of purpose-built income-producing assets have been the greatest beneficiaries of North American capital,” he says. “This was most pronounced in the UK, Spain and Ireland. For some time, the UK was branded nascent, but that’s no longer the case as more capital has moved in and the range of investment opportunities has increased.”
Not all European markets operate under the same rental market legislation, making multiple market purchases trickier. Coupled with political risk, that could give North American investors “pause for thought” in some European markets, says Espenshade.
“Brexit and new rental legislation in Germany are potential headwinds, but other European markets are comparatively stable in that respect.”
While Europe may appear less crowded than the U.S., domestic investors are also seeing the value, providing some competition for assets.
While North American capital has become increasingly active in Spain, such as the recent market entry by South Carolina’s Greystar, so has European capital. French, Swedish and UK investors all ploughed capital into Spanish multifamily assets in 2018.
Meanwhile, Germany which is regarded as a mature multifamily market given the country’s high proportion of rental properties, has also attracted a mix of capital sources, ranging from Danish pension fund money to major global investment managers such as Blackstone.
Added to that competition, building networks – for example with suppliers at a time of high construction costs – can also prove a challenge for incoming U.S. investors, says Espenshade.
“Having a network of contacts along the construction chain – from architects to builders to suppliers, is something investors have been used to in their own markets and are looking to replicate abroad,” she says.
But, despite the challenges, Espenshade believes capital will continue to flow to Europe.
“There’s still significant amounts of capital being raised by major investment managers,” she says. “In the search for new multifamily assets which produce steady income, they will inevitably need to head abroad.”
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