Capital raised for residential-focused private real estate funds may have eclipsed all records last year, but if Q1 2022 was anything to go by, then even greater heights are in sight. The first quarter ended $1.23 billion higher than in 2021, with Pretium Partners’ Q1 final close breaking into the top three largest residential funds over the past five years.
Capital raised in 2021 had already almost doubled the previous year’s total of $14.1 billion and the dominance of North American focused funds shows no sign of slowing. Only one Europe-focused fund in Q1 made the top 15 largest residential funds by size on final close. Of the funds in market, however, the situation is slightly different, with an even split between European and North American regional focuses.
Residential fundraising, while growing in absolute terms, is accounting for a decreasing share of real estate fundraising overall, a trend that appears to be continuing for a fourth consecutive year, although the sector still bested industrial, hospitality and office segments with a 39 percent stake in the market.
1 Multifamily in the ascendancy
Investment in multifamily real estate accelerated last year, exceeding previous records, as demand held strong in the face of the pandemic and changing consumer preferences. In the US, migration to the Sunbelt was a major driver of investment, particularly to cities such as Dallas, Atlanta, Phoenix and Houston, with occupancies at an all-time high.
“The US is underhoused, meaning that investment in multifamily, as well as single-family rental, build-to-rent and other specialty housing, such as senior and student, will remain investor favorites,” says Colliers director of research, US capital markets, Aaron Jodka.
In Europe, record-breaking deal volumes across 2021 were driven mainly by large corporate transactions, including Vonovia’s takeover of Deutsche Wohnen for €19.1 billion, and Heimstadan acquiring 599 German, Swedish and Danish properties for €9.1 billion.
“Germany continues to be a core investment market, but we are also seeing strong investor interest in Spain, Ireland and Scandinavia,” says Richard Valentine-Selsey, director of residential research at real estate services firm Savills. “While Europe is growing, total volumes still lag behind the US, [which] reached $352 billion in 2021, again driven by large portfolio trades.”
Brian Murphy, chief executive officer at real estate lending platform Veleta Capital, adds that several factors have converged over the past few years to contribute to the record run-up in multifamily. “An enormous amount of liquidity coupled with record low interest rates over the last few years have compressed cap rates and driven asset values to all-time highs,” he says.
But whether demand and investment growth in multifamily can be maintained at the same level across 2022 and beyond will be touch and go. “The rapid rise in interest rates, coupled with supply chain issues, are significant challenges to further investment growth in the sector,” warns Murphy. “Construction costs are up dramatically, deliveries are taking longer, and developers are having to recast their stabilized assumptions. There is some dislocation between sellers and buyers on asset values given the new rate environment and the fear of a potential recession.”
2 From the cradle to the grave
While the birth rate may be in freefall across many developed economies, aging populations in Europe and North America are only increasing the urgent need for quality housing to cater to the specific needs of senior citizens.
According to Savills, just 1 percent of people aged over 65 in the UK live in integrated retirement communities, or housing with care, against roughly 6.5 percent in the US and 5.5 percent in Australia.
Shortage of supply, combined with the growing 65-plus demographic, is creating the perfect opportunity set for private real estate investors. “Many active seniors don’t want to be isolated in a traditional senior housing facility,” explains Olli Fischer, investment director at Nordic Real Estate Partners. “They want to engage in a community, and they want to have meaningful activities and interactions with a lot of different people.”
Colin Rees-Smith, a senior director at BNP Paribas Real Estate, however, points out that retirees are often still hesitant to move out of family homes and into housing-with-care facilities. “It’s important that the next generation of senior living continues to be in homes that are attractive, comfortable places to live and, critically, part of the social fabric of the wider community. A positive living experience that tenants will embrace, not fear.”
To provide this, investors and developers need to consider the requirements of senior living. “We do have to be very careful to ensure we have all the correct mobility specifications in place,” says Patrick Bone, a real estate fund manager at Schroders Capital. “Rooms must be a certain width, so that they can have wheelchair access. There are also walk-in showers. So, in terms of the design, a lot of consideration needs to go into the fact that some of the people living in these retirement apartments are often facing mobility issues.”
The desire for community-style living is also not restricted to just senior living. Lockdowns through the pandemic period and affordability pressures have boosted the appeal of co-living spaces for young Western consumers, particularly in urban centers like London.
“Areas with significant higher education establishments with strong retention rates and high levels of inward migration and low unemployment are likely to be where co-living works best. However, many operators, particularly those focused on small to mid-size schemes, see the geographical demand being much wider,” says Richard Stonehouse, head of residential investment at commercial real estate services firm Avison Young.
As a case in point, Barings entered the Italian market in April, investing in co-living real estate in northern Milan. “The residential market in Italy has been very small historically by western standards, but increasingly that’s changing,” says Ben Pile, Barings head of residential investing and asset management, Europe. “Traditionally, people have bought in Italy, but house prices have got to a level where there’s a certain level of unaffordability, and increasingly people are turning to the rental market.”
3 Eyeing opportunities further afield
Investors may also increasingly turn to emerging markets. While those may have been slow to soak up capital in recent times, with investors largely favoring domestic real estate, that appears to be changing. “The argument is that in the past several years a US-based pension fund or endowment based in the northeast of the US could invest in almost any real estate in that region,” says Ken Wainer, founding partner of Brazilian investment manager VBI Real Estate. “If they did so well over the past decade, then why would they go into a market they don’t know?”
But for those willing to take the plunge, there are plenty of opportunities in Latin America and Asia-Pacific. Brazil hosts the largest residential market in Latin America, with São Paulo topping the list for real estate transactions.
“Brazil has a shortage of affordable housing – the most recent data shows a shortage of seven million affordable homes – and this is a consistent government problem of providing homes for low-income Brazilians,” says Joao Teixeira, senior managing director at GTIS Partners. “We’ve seen very strong production. It’s very dependent on the cost of land because there is a ceiling on the total price you can sell an apartment for.”
In China, multifamily real estate has proved robust despite the pandemic and purchase restrictions. Beijing has also put in place favorable policies such as reduced tax rates for multifamily operators. “Throughout the pandemic, multifamily rental assets have been more resilient in terms of occupancy rates and rent collection compared to retail, hotel or office assets,” explains Claire Tang, co-CIO for Asia-Pacific and head of Greater China at LaSalle Investment Management.