PATRIZIA Insight into European Residential Markets 2020/2021 :
Living doesn’t stop because of a pandemic
The living sectors have maintained their reputation for resilience and stable operating cash flows throughout
the COVID-19 pandemic. For example, rent collection for multifamily housing has remained stable at
levels between 90% and 95%. However, future performance of the different residential categories will vary
significantly as the sector is not immune to the repercussions of the global pandemic. But knowing the rules
of the game and the (politically induced) changes it involves will remain a key success factor, especially in
these uncertain times.
Residential is an attractive bond substitute
Thanks to its superior cash flow characteristics and capital value preservation, diversified residential, in
Europe in particular, is an excellent substitute for fixed income. It offers a 200-300 basis point yield spread
compared with national ten-year government bond yields and attractive net operating income (NOI) growth
perspectives, especially given that inflation concerns are expected to rise over the mid to long term.
Housing needs to be affordable
Ongoing urbanisation is causing rent and property prices to rise in all major European agglomerations, which
is challenging housing affordability. The relationship of expenditures to the resources available to a household
is the most widely used measure to define or evaluate housing affordability. As a rule of thumb, a threshold
of 30% is seen as the cut-off above which housing becomes ‘unaffordable’. But given the complexity of the
concept, strategic recommendations within this framework must always be adapted and augmented with
respect to the project under consideration.
Be aware of the credit cycle
With COVID-19, credit standards are again tightening significantly. Risk perception has clearly increased
due to growing uncertainty around the impact of the pandemic on the economy and unemployment levels.
Therefore, it will become more difficult for private households to obtain loan approval for house purchases.
But there are many more indirect impacts that institutional investors need to consider. Take the relationship
between changes in credit standards and the growth of house prices or the effect on rental growth as two
examples that need to be incorporated into business plans.
The future is data intelligence
Access to data nowadays is more critical for decision making than ever. Although looking at institutional real
estate investments with a machine involves several difficulties, intelligent analytical methods can be applied
to detect relationships, find unknown life in data and discover patterns that may intuitively seem logical,
but that could not be previously validated. Spatio-temporal regressions, or analytical tools like the PATRIZIA
Amenities Magnet show the way to the future and will improve decision making and ultimately
Residential remains the place to be
Over the past six months COVID-19 has changed our lives, but compared to a year ago, market fundamentals
for investing in European multifamily housing remain largely unchanged. The general imbalance between
supply and demand continues as net additions will most likely be zero or only slightly positive. Consequently,
pressure on residential prices and rents will remain. Overall investors can expect total returns for European
buy-and-hold multi-family housing strategies ranging between 5% to 6% per annum over the next five years, of
which 2.5% to 3.5% will be income return.
Source : Company