The residential rental investment amounted to 46,000 million euros in Europe during 2020, according to Savills Aguirre Newman. This figure represents an increase of 6% year-on-year and 17% compared to the average of the last five years.
According to the European Multifamily report, prepared by the consultancy, Germany accounted for 40% of investment in this segment, followed by the Netherlands (15%), Sweden (12%), Denmark (9%) and Spain and United Kingdom (6% both).
Strong competition for assets producing stable revenues has caused a return adjustment in recent years. The average prime rental yield has dropped 120 basis points since 2012 to reach an all-time low of 3.24% in 2020. Multifamily net returns range from 2.4% in Berlin to 5% in Warsaw, although most markets offer prime net returns between 3% and 3.5%.
The study reveals that, although the multifamily segment is becoming a more expensive asset type for the investor, the differential2 of its profitability over the risk-free rate remains attractive at around 294 basis points, against a long-term average of 247. Competition for this type of investment is expected to be strong, especially in markets where the supply of rental housing lags behind demand.
The company also points out that restrictions and delays in construction activity over the past year may further intensify the imbalance between supply and demand for professionally managed rental homes in major European cities.
Given the likelihood that economic uncertainty will exacerbate the demand for rent, the consultancy points out that the prospects for rising rents can be mitigated until households confidence recovers. In any case, contracts are covered against inflation in most markets, allowing for stable income.
Because of the defensive characteristics of the multifamily sector, Savills also foresees that banks will be an active source of capital for the promotion activity and that it is likely to see more investors involved in the production of new stock. Similarly, the entry of new players into the market will underpin transactional activity to consolidate the residential rental as one of the main real estate segments in Europe.
«According to our estimates, Spain needs to promote more than two million rental homes, an important part with some type of protection or with affordable rents. There is a high interest from institutional investors to develop a new product in our country and a firm commitment from public administrations to increase the supply of rental housing and to place ourselves at the level of other European countries », explains Susana Rodríguez, CCO of Savills Aguirre Newman.
Rent regulation in main European cities
The report points to emerging concerns in Europe about the impact of institutional investment on affordability of rental housing. The authorities have introduced measures to protect tenants. However, these measures can be seen as a cause of adverse effect, as they discourage the production of new housing to balance supply. Nevertheless, controlling rent increases can provide security for both tenants and investors as they know what to expect. Currently, regulation is tightening in cities such as Paris, Berlin, Amsterdam and Copenhagen.
In the comparison of regulatory measures by city, most have regulations that are stricter for new rental contracts in the existing stock, while greater flexibility is provided for newly built or rehabilitated homes. Several cities have established a local rent comparable as a reference for prices and in most cases it cannot be exceeded. Regarding the revision of rents, in a large part of the markets it is directly linked to inflation.