Despite growing demand for residential properties in Europe, the market is currently too fragmented to become a major institutional asset class in the near future.
That was one of the key conclusions of a panel discussion on residential investment during the ULI Europe annual conference in Paris this week. 'Europe offers significant investment opportunities,’ noted Michael Ball, professor of Urban & Property Economics, Henley Business School. ‘Demand is expanding and many European cities face long-term acute housing shortages. But I don't see a pan-European market developing across markets taking advantage of opportunities for scale.'
In the US, the residential sector plays an important role in the portfolios of institutional players thanks to efficiencies in the market and the existence of specialised REITs. In fact, the apartment sector in the US accounts for the second largest share of institutional investors’ real estate holdings, lagging only the office sector.
While Europe has a larger private rented sector than the US, especially in the more affluent countries of northwestern Europe, institutional residential investment is limited, Ball said. 'The prime cause is regulation. It varies enormously across Europe.'
Ownership and taxation regulations rarely favour institutional residential investment in Europe, he added, 'European residential regulation favours incumbent households.'
Another factor is that REIT regimes in Europe exclude residential property. At the same time, supply restrictions have created high return opportunities if barriers can be overcome, 'Lack of institutional investment is a major barrier to development,' Ball argued.
Laure Duhot, director strategic capital markets at Grainger, the UK-listed resi specialist, confirmed that it was hard to create the necessary scale in the UK to turn residential property into an institutional asset class.
'The UK is a very fragmented market, it's difficult to create critical mass. But there is appetite from investors and more suitable stock is needed to address imbalances in demand and supply.’
As in London, demand in Paris by far outstrips supply, reported Gilles Bonnier, chief financial officer at French REIT Gecina. 'We face a constant shortage of product, but radical political changes are needed,' he said, pointing to the fact that Greater Paris has no less than 1,200 boroughs compared to just 40 in London.
While German residential is a favourite with many foreign investors at present, the opportunities for investment are still relatively limited, according to Thomas Zinnocker, CEO of listed Berlin resi specialist GSW Immobilien.
The company has seen its share price rise by more than 50% in the past two years and there is plenty more equity splashing around in the sector. But Zinnocker estimates that the total volume of the listed resi sector in Germany comes to just €5 bn, a mere fraction of the €4,000 bn in total resi assets in the country.