The fundamental human need for living space means residential real estate is finding a place in more and more institutional portfolios.
House price growth slowed last year, according to the Knight Frank Global Residential Cities Index, which tracks prices in 150 major cities worldwide. Globally, prices rose 4.5 per cent last year, compared with a rise of 7 per cent in 2016.
The key driver of growth in prices and rents in larger cities worldwide is demographics. Developing countries such as India have relatively youthful populations and high birth rates, driving demand for housing. However, mature markets such as Germany and the UK see continued urbanization, with a move toward larger cities.
“There are not enough homes being built in any of the world’s leading cities and the proportion of the population renting is rising in most markets”
The positive fundamentals of the sector are attracting interest from real estate investors looking for stable, defensive income. Andrew Allen, global head of investment research, real estate, at Aberdeen Standard Investments, says: “Commercial real estate sectors, particularly retail and offices, are in the process of fundamental changes, but the residential sector does not suffer from the same issues. There are not enough homes being built in any of the world’s leading cities and the proportion of the population renting is rising in most markets.”
Tim Wang, Clarion Partners managing director and head of research, adds: “Investors love the multifamily sector because housing is a necessity. There will always be good demand for multifamily rental regardless of economic conditions. Historically, the sector has one of the best risk-adjusted returns.”
Europe: Germany is the key multifamily market
When it reconstructed its housing stock after the Second World War, Germany built apartments for rent and – aided by tenant-friendly regulations – renting became the norm for Germans and led to the creation of an institutional market.
Dr Marcus Cieleback, chief economist at Patrizia, says: “Germany is the largest residential rental market in Europe and so offers the most liquidity, followed by the UK, the Netherlands and the Nordic countries. These four markets account for 80-90 per cent of Europe’s institutional residential transactions.”
Cieleback adds that demand is not the only factor that makes European residential property look attractive as “very low construction levels are restricting supply” so that many cities are not building enough to cope with obsolescence, never mind increasing populations.
Investor interest in Germany has led to it seeing some of the highest price rises in 2017: Berlin was the top city in the world for house price growth, according to Knight Frank, and Hamburg, Munich and Frankfurt were also in the top 10. Cieleback says: “It is challenging to source product, with competition coming from family offices and high-net-worth buyers.”
The key to sourcing product in Europe is to have boots on the ground, says Marc Pamin, senior fund manager at Aberdeen Standard Investments, which launched a pan-European residential property fund in April. The British fund manager raised “in excess of €350 million” from eight investors in The Netherlands, Switzerland and Luxembourg, and says it plans to grow the fund to €1 billion in assets.
Pamin says: “It is important to have people on the ground where you are investing, in order to build relationships with local developers and to keep pace with local regulatory regimes.”
He says the strategy is focused on cities, rather than countries. “We look for cities with positive demographics, which create jobs and offer a good quality of life. We take a ‘triple A’ view, looking for accessibility, affordability and amenity.”
Aberdeen’s new fund is targeting a 5-7 percent annual total return with an income return of 3-4 percent. Similarly, Patrizia’s Cieleback suggests European rental residential property will produce income yields of 2.5-4 percent. Residential is a globally favored sector for Aberdeen and Pamin says: “On a risk-adjusted basis we believe that European residential real estate is the best-priced property segment globally.”
North America: New jobs and households drive the market
The US is the home of institutional investment in multifamily residential and the sector remains positive for investors and managers, says Clarion Partners’ Tim Wang. “In 2017, the US added 2.3 million new jobs and 1.4 million new households, which drove demand for both rental and for-sale housing. Approximately 23 million young people (18 to 23 years old) are still living with their parents, suggesting there is huge pent-up demand.”
Clarion expects markets in the south and west to outperform because of stronger employment growth and robust demographics, while affordability is an increasing concern in a few large coastal markets such as New York City. “A combination of large amounts of new supply and lower affordability may lead to anaemic rental growth in the near term,” he says.
US multifamily has been a target for overseas investors: last April, German pensions group Bayerische Versogungskammer awarded a €750 million mandate to USAA Real Estate Company for investment in multifamily residential assets across the US. In October, Canadian pensions manager PSP Investments and Alberta Investment Management Corporation invested together in a $1.3 billion US multifamily joint venture.
Canada itself has seen sharply rising housing prices and rents, according to JLL’s latest market report, which describes demand for Toronto residential as “voracious,” while demand is “as strong as it has ever been” in Montreal. However, Vancouver remains the strongest multifamily market in the country, JLL says, with vacancy rates averaging 1 percent.
Asia-Pacific: Sees the demand for the affordable and unaffordable
The Asia-Pacific region has the most diverse range of residential markets. The Indian government estimates that 30 million affordable housing units need to be built by 2020 to meet demand. In Hong Kong, meanwhile, records continue to be broken for house and apartment prices: two flats on the city’s Victoria Peak sold for around $17,000 per square feet last year for example. Elsewhere, urbanization is the key driver, often counter-intuitively. Both China and Japan have aging populations, but both are seeing continued urbanization as younger workers move to large cities seeking better opportunities for work and lifestyle.
The multifamily segment is nascent in Asia-Pacific: in developed markets such as Hong Kong, Singapore and Australia, owner-occupation is preferred and in emerging markets such as India and Indonesia, the overwhelming need is for cheap plentiful housing.
“There will always be good demand for multifamily rental regardless of economic conditions”
However, the multifamily sector is growing in Japan and is popular with real estate investment trusts and has enormous potential in China. At the Communist Party’s 19th congress last year, President Xi Jinping said: “China will accelerate establishing a system with supply from multiple parties, affordability from different channels, and make rental housing as important as home purchasing.”
A number of domestic companies have launched rental housing brands, often with an element of co-living, where shared facilities allow the landlord to save space and renters to save money. A number of ‘quasi-REIT’ structures are being trialed in China at the moment, and REITs are expected to play a major part in the residential market in the future. Henry Chin, head of Asia-Pacific research at CBRE, says: “Interest in multifamily is driven by higher entry yields in the case of Japan in particular and the weight of capital everywhere. Multifamily is set to become mainstream in Australia due to demand from institutional investors and China where it is driven by government policy.”