Under-allocated investors eye European residential deals

Residential subsectors are providing an attractive array of opportunities in Europe at present, said investors on a panel at the PERE Network Europe Forum in London this week.

“It’s an area where we’re very, very underweight and it’s not an area that we want to be underweight because of the very, very attractive dynamics,” said Cheryl Maher, managing director for real estate investments at CPP Investments. Prolonged low yields and heavy regulation are reasons why the Canadian public pension fund is most underweight to residential out of all sectors in which it invests in Europe, she added.

The non-regulated market in the UK, where the investor is currently progressing with a number of single-family rental opportunities, is therefore a key focus, she said. “Although that doesn’t preclude us from looking at any regulated markets, it’s just trickier for us to access those.”

Maher added that Germany and the Nordics are other markets of interest to the pension fund from a single-family residential perspective, owing to the potential for distressed opportunities to emerge.

For Frida Olsson, portfolio manager for alternative investments at Swedish public pension fund AP4, investing across the varied regulatory environments in different European countries could be beneficial. She points out that in Sweden and Germany, where the housing market is regulated, rental growth has tracked much lower than inflation for the past couple of years, but the expectation is for rental growth to exceed inflation over the next few years to compensate.

“So, mixing a portfolio with different residential markets with strong fundamentals but with different regulations might be something where you can benefit from and also have diversification at the same time,” she said.

Despite the attraction, residential is not a straightforward investment proposition in today’s market. Abigail Shapiro, senior vice-president, UK and Europe at Canadian investor Oxford Properties, told delegates her firm has “struggled” with residential in the UK because supply is constrained, making it challenging to get an appropriate yield from the offset on an existing product. However, she is starting to see some signs that the sector is repricing, so the opportunity opening up “could be interesting.”

Going forward, she says Oxford Properties will likely “be shying away from taking full development planning risk, but maybe thinking about it more from a forward funding model to get a bit of yield from taking the leasing risk.”

Three of a different kind

The diversification benefits on offer from taking different jurisdictional plays in European residential can also be overlaid by investing across the sector’s three primary food groups of build-to-rent, single-family rental and purpose-built student accommodation, delegates heard.

Like Maher, Olsson said single-family rental was of interest. “I think it’s hard to get scale and it’s a concept that is not proven in Europe yet. But the number of pitches that we get daily from the US says it’s working there at least.”

Shapiro said Oxford Properties is looking at markets in Southern Europe, such as Spain, for opportunities in flexible living specifically. “The world has shifted and I think Southern Europe has got some stronger macroeconomic outlook growth behind it. And I think that that is a region where institutionalization is equally pretty far behind places like the US.” She added that affordability is also attractive in those markets.

Catherine Hong, senior adviser at Sur Multi Family Office, a London-based multi-family office for a group of Saudi families, said Spain is also attractive from a PBSA standpoint. “If you build up enough scale, you get that operating efficiency again, and the yields are significantly higher than we can achieve with traditional rental residential,” she said.

Maher noted how a lot of people are talking about PBSA in Europe right now, but that there is not a lot of competition on the continent given not a lot of platforms “have capital to actually move right now.” But that will change, she said, due to the “huge amount of people trying to get into this sector.” In the UK, by contrast, the sector is more established among institutional investors and so there is less risk of overcrowding, she added.

For Jenny Hammarlund, senior managing director and head of Europe, real estate at Canadian pension fund Ontario Teachers’ Pension Plan, “there’s enough capital” for all three of those subsectors.

She explained: “I’m not sure that a lot of investors are taking a view that they only want to allocate in one of those living sectors. I think a lot of what we’ve been discussing comes down to portfolio allocation. And a lot of investors are just under-allocated to residential relative to where they want to be, and therefore they’re willing to consider all different sectors within living more broadly.”