Development of the private rented or multifamily sector is evolving at a divergent pace across Europe, creating a two-tier market. Germany, which has a renting culture, is most established while UK PRS is only just starting. Lauren Parr reports.
Multifamily residential continues to see increasing investment as the sector becomes recognised as an institutional asset class, with investors’ knowledge and experience of the German market driving increased exposure in other jurisdictions.
Private equity firms have made their mark in territories including Germany and Ireland, while the UK has attracted fund managers from the US and Canada. Just a handful of players are active on a pan-European basis; local pension funds tend to dominate their respective markets, particularly in Switzerland, Finland and Sweden.
On-the-ground expertise is required given that each market operates under different dynamics, from the type and accessibility of stock, to cultural ownership, to regulation of rents and government policy on housing provision. Some aspects are universal, however.
“No matter where you look in Europe’s major cities you have a supply/demand imbalance,” says Marcus Cieleback, group head of research at Patrizia, which is targeting the mid to lower end of the multifamily housing market across Europe. “You’re not worried if you’ll find a tenant for what you’re building or buying; it’s about whether you can find stock. There is still strong urbanisation across Europe with people migrating to cities where jobs are, meaning cities’ land prices have gone up tremendously.”
Institutions tap in
Forward funding is a way of institutions tapping in, attracted as they are to the sector’s long-term, income producing assets at rents quasi-linked to inflation.
Where possible, banks are keen to provide conservative leverage against an asset class that looks particularly defensive post-Brexit. “It’s much easier to rent these units in a downturn than it would be to sell if the housing market changed,” says Mark Bladon, co-head of origination at Investec Structured Property Finance.
In many European markets, multifamily is a compelling asset class for banks; it has a stable income stream and very diverse tenant base. For many German banks, even at the height of the financial crisis, residential was still an asset class they would lend on. “Others are catching up with that, driven by the cash flow stability, low risk and diversification of the asset class,” observes Kirk Lindstrom, managing director at Round Hill Capital.
Investors tend to finance their residential investments at conservative leverage with local banks, given the input it takes to comprehend nuances in individual markets. Sparkassen – public savings banks – are heavily invested in Germany’s multifamily sector for this reason. German mortgage banks are borrowers’ other go-to lenders, and they understand the asset class well. Income generating assets that fit into pfandbrief banks’ cover pools can be financed at pricing as low as 80-90 basis points in Germany.
‘Play’ moves from existing stock to development
A major ‘play’ for international investors in the German residential market has been buying existing multi-family stock, on average around 20,000 units, as part of the privatisation of rental apartments over the past 15 years. Many of these deals ended up in securitisations, having been financed at high leverage by investment banks.
That strategy is now surpassed by the prospect of developing apartments from scratch. With little housing development over the past 20 years and “a big gap between existing and growing demand and the number of new units being put on the market” according to Christoph Reschke, co-managing director of Hines’ operations in Germany, the build-to-rent model represents an attractive opportunity if you can get hold of a good plot with access to public transport.
Germany is Europe’s largest country by inhabitants and it’s doing very well economically – an offset for a declining population overall. The urbanisation effect is adding to that, with people moving from smaller cities to the top 10 or 15 larger cities, including Berlin.
“Demand there is crazy and vacancy is close to zero,” says Philipp Braschel, partner and head of Germany at Benson Elliot. The government is still transferring its personnel to Berlin from Bonn, while the tech start-up scene has spread from Munich. Some 20,000 new apartments are warranted but only about 5,000 were completed last year, by Braschel’s estimation.
An additional factor relates to rent controls put in place by the government. “These only refer to existing stock so new-build is the only stock available which can go up in pricing without limit, and given huge demand in cities like Berlin, the rent control will enhance rental price for new-builds even more which makes new development even more attractive,” he says.
The German build-to-rent sector has been dominated by local pension funds and insurers to date, with yields comparably low against other European markets. Like them, Hines sees the attraction of rising rents and new demand, plus the fact “people need to live in economically good times and bad times so there’s little vacancy,” Reschke says.
It has made its first German PRS investment after a couple of years of searching, teaming up with a doctors’ pension fund to develop 530 free-market rental apartments in Berlin. At least half of German multifamily developments are thought to be funded through to completion by such end investors with a low cost of capital.
All-equity buyers are becoming more common, with competition to secure land fierce. Benson Elliot is preparing to start construction of a residential-led development including 700 flats with a volume in excess of €300 million, on a plot close to Berlin’s main train station next year. Its strategy is to “build PRS and sell that to pension funds and other long-term investors who are actively looking for new low-risk yielding product to put into their portfolios,” according to Braschel.
While Germany enters a new multifamily development cycle, the sale of Dutch housing continues to unfold following the introduction of legal changes aimed at improving the country’s social housing stock a few years ago.
Set against a general housing shortage, taxpayer-backed housing corporations are being encouraged to sell off non-core, mid-market assets in order to get their finances on track or help fund development of new housing for people in need.
As one of the market’s biggest multifamily investors, Round Hill is primarily targeting affordable housing. “The majority of the units we own fall within the regulated sector which is attractive from our perspective because of the substantial supply shortage,” Lindstrom says. Its €700 million-plus Dutch residential portfolio was recently refinanced with a €460 million loan structured by ABN Amro. Debt pricing typically ranges from 120 to 150 basis points.
Copenhagen attracts capital
A smaller market that has attracted a substantial amount of both domestic and foreign capital is Denmark – Copenhagen in particular. It shares some of the same migration and supply characteristics as its German neighbour and saw a 200 per cent increase in investment turnover in the space of 12 months, shows Savills data.
Resolution Property has been an active player in the market since 2011. “There’s little new supply, thus vacancy rates are incredibly low and one can get good quality of income. Additionally there is potential, subject to rent control laws, to increase income through rent reviews,” explains the company’s head of European property investment, Scott O’Donnell.
The Central European market has got investors talking, thanks to rising urbanisation. Round Hill has also been an early mover in the emergent Czech market, where it acquired the country’s largest privately owned rental residential property company with more than 43,000 units last summer – a deal through which it inherited a traded bond. Says Lindstrom: “The Czech market demonstrates similar, if not better, dynamics than Germany.”
From Patrizia’s risk-averse institutional perspective “it’s a little too early” to invest in places like Warsaw or Krakow. Says Cieleback: “Poland is still a very owner-occupier dominated market. The price level of product means you need to develop to rent and with where land prices are, possibilities do not materialise.”
Casting a pan-European eye, he believes the UK build-to-rent sector “is worth being active in” (see panel) while the German market offers an attractive proposition if investors can overcome the element of competition.
Some markets may be easier to access than others but with a colossal supply/demand imbalance in Europe’s metropolitan cities, the rationale to invest in private rented stock remains cast iron as reflected by the level of capital chasing the sector. The move towards new development marks the next stage of institutionalisation, widening the door for secured finance as the cycle progresses to the sale of completed, stabilised stock.
Milestone year for UK PRS stock
The institutionalisation of UK PRS is underway, and this year will be particularly significant. Says Investec’s Bladon: “People have been talking about build-to-rent for the last 10 years but it’s never really taken off because the build-to-sell model has always been more profitable.”
An increasing population and a lack of affordable housing for young people has marked a shift towards renting over the last few years, however. The main drawback for investors remains the lack of efficiently manageable stock with the exception of a few examples like the Olympic Village, acquired by a joint venture between Delancey and Qatari Diar.
“It’s taken so long to get the sector going because you have to build it first,” Bladon says. “For the first time we’re about to see a number of purpose-built schemes being delivered and letting up.” Essential Living’s 100-unit Vantage Point in Archway is one such example, financed with a loan by RBS.
M&G’s forward-funding of a PRS scheme comprising 173 flats in North Acton is due for completion in February. “The fragmented nature of the UK housing market makes it difficult for us to buy in scale in one location; this is the entry point to market currently,” says M&G Real Estate’s head of residential investment, Alex Greaves.
Completed stock sold as stabilised assets in the secondary market will help kick the market on, Bladon reckons. “Once more mainstream house builders and developers see how PRS developers are able to control costs, drive rents higher and the net cash flows they can generate, they will start to think that PRS schemes can be just as, if not more, viable than the buy-to-sell model,” he says.