Is European Rental Housing Really an All-Weather Asset Class?
Whilst no part of the economy or capital markets remains untouched by the pandemic, some real estate sectors are more affected than others, whether that be through the normal course of the business cycle, the idiosyncrasies of social-distancing measures that weaken occupancy, or a shift in investor sentiment towards long-term prospects that undermines valuations.
We at Greystar, firmly believe that rental housing will continue to prove an ‘all-weather’ asset class, given the non-discretionary nature of housing (people need a roof over their heads), well-established secular trends support occupancy (demographics, chronic undersupply) and positive investor sentiment that supports valuations. We recently published our whitepaper, European rental housing: an all-weather asset class, here are some key insights you should know now:
Demand for urban housing is driven by ‘three gears’ of population growth, urbanisation and household formation; with urban household growth at c.10% in Europe since 2010
It is widely understood that demand for housing is driven by demographic trends; the more people there are, the more housing they need. However, a deeper analysis reveals that this is not simply population growth, but rather three distinct and interlinked ‘gears of demand’: population growth, urbanisation and household formation. Population growth is a 10,000-year trend that began with the agricultural revolution. Urbanisation is a five-hundred-year trend in Europe that accelerated with the industrial revolution around 1800 (and has survived numerous pandemics during that time). Household growth is a post-war trend that is a consequence of manifold social trends i.e. more people living alone as they marry later, have children later and divorce more often. These are extremely long-run secular trends and remain uninterrupted by cyclical factors.
The rise of rentership is driven by home price affordability
Independent of demographic trends, we have seen a sharp rise in home prices around the world in recent years, driven largely by supply-side pressures and historically low interest rates. In Germany, with arguably Europe’s most developed private rental sector, home prices have risen 20% faster than incomes and 25% faster than rents over the last five years. The same trend can be seen across Europe and is even more extreme in major cities. London and Paris are amongst the most expensive housing markets in developed countries, in terms of home price-to-income ratios. Along with increased deposit requirements, this has made home ownership increasingly out-of-reach for many, with renting being the only affordable option. For this reason, virtually all demographic growth is accruing to rental housing in Europe.
Public policy and the global financial crisis have led to chronic shortages of housing supply
Despite strong demand growth throughout the last cycle of household growth, there has been a further structural shift downwards in new supply. Across Europe, annual housing supply is down 63% from the peak of 2006 and remains 30% below the long-term average. These supply-side pressures are largely owing to tighter credit conditions and planning constraints in many markets and show no signs of abating. Our analysis suggests that there is a structural deficit in housing supply, with annual completions anywhere from 11% to 25% below household formations. The fact that construction was halted during lock-down will only serve to widen this deficit.
Exposure to global demographics has given way to defensive diversification in student housing
As no area of the economy remains unaffected by the pandemic, the 2020/21 academic year has certainly been disrupted by the pandemic, with many complications for entrance exams, student visas and flights. However, the UK saw a record number of applications this year, which is somewhat remarkable given that 2020 is the year that the number of 18-year olds is estimated to trough. Applications from China also hit a record high and were more than double those of five years ago. In the UK, Germany, France, Spain, the Netherlands and Ireland, all are issuing student visas and are allowing students to return to campus. In these same countries, at least 70% of flights have resumed and many universities are adopting a ‘hybrid’ (online/ on-campus) model, whereby students can study on campus whilst managing the utilization of physical space in order to observe social distancing requirements.
Notwithstanding the pandemic, student housing remains a counter-cyclical asset class. We expect occupancy to take a near-term hit, but rental rates are likely to remain resilient. As occupancy recovers, we expect to see continued rental growth with few risks from a weak economy and labour market, as student numbers tend to rise with unemployment as graduate students ‘retool’ for the recovery phase of the cycle.
The rise of rental housing as an institutional asset class in Europe
Rental housing is now the largest real estate sector in Europe, accounting for €19.8 billion of transactions in the second quarter of 2020. Post-pandemic, multifamily investment volumes have proven more resilient than office and retail, and the sector has continued to increase its market share. This is not surprising given global investors experience in the US, where multifamily has outperformed all other sectors in each of the last two cycles, in terms of the least rental decline during the recession phase and the most rental growth during the recovery phase. Even in the depths of the global financial crisis, occupancy rates never fell below 93%. Since the outbreak of Covid-19, rent collection rates have not fallen below c.95% for institutional-grade product.
In conclusion, European rental housing is an all-weather asset class. Demand for housing in Europe is driven by well-established demographic trends that have prevailed during previous pandemics, and housing markets remain chronically undersupplied because of public policy and credit conditions that remain in-place today. Further, we expect the deficit will only be exacerbated by the effect on construction under lockdown. Home price affordability has pushed demand towards rental housing, and this will likely be exacerbated by the pandemic’s effect on savings and credit conditions.
Interested in finding out more? Read the full whitepaper here.
Juan Acosta, Managing Director
Mark Allnutt, Senior Managing Director
Nigel Allsopp, Senior Director, Research & Strategy
Jennifer Ciullo, Managing Director, Investor Relations
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