GRIWhat will it take to uncork Europe’s bottled up resi supply?
The rise of urbanisation and migration into European cities has left most places in need of new residential stock.
August 6, 2018Real Estate
To most, investing in residential feels like a no brainer as a way to diversify risk with countercyclical strategies in today’s low yield environment.The continuing rise of urbanisation and migration into nearly every European town and city has left most places in dire need of new residential stock. Such impressive imperfection should present investors and developers with a tidal wave of opportunity across all residential assets from refurb to new build, across all demographics and across all price-points to satisfy an overwhelming demand.
Right? Not so; instead of capitalising on growth opportunities, Europe’s residential stock appears to have been completely bottled up. Developments have stalled, innovative brands struggle to gain finance and partner with the right investors, land and construction costs are sky high. Most crucially, few and far between projects have achieved scale and thousands of nuances and disparities in local planning, development and investment regulations have global investors clinging onto their capital rather than brave the risk curve.
The game changer...
If such sentiments are true, what will it take to uncork Europe’s residential supply and who will be the pioneers and what strategies might just see us through?
‘The game changer for me will be the operators, the institutional platforms that can build and run large scale developments’, remarks Owen Lynch, MD, LGL Trustees (GRI Club member). When we take the UK PRS market as an example, it still feels very immature in terms of being an institutional asset investment class.
‘Unlike the US and European markets where portfolios in excess of 40,000 homes are common, the number of active portfolios (excluding pipeline and planning consents) in the UK that exceed 1,000 homes can probably be counted on one hand. Efficient operators, achieving low operating costs and low void periods will be a significant factor in achieving the returns that long term institutional investors need. Part of this will come from scale, both in terms of individual locations and across the platform. Early adoption of innovative technology, to make the residents’ experience of dealing with the operator seamless will also be important.’
Such thoughts reflect the fact that we are far from being on the right track to unlocking supply. So much hangs on finance for the development of new stock and investors must think smarter and work harder to cater for demographic demands, and, more importantly their purse strings. This is easier said than done with costs being raised at every stage of the asset lifecycle - land, construction, operation, development and management costs which results in new-build rental stock that prices out the majority of the mid market.
In order to bring in more institutional platforms to unlock supply, perhaps we are starting in the wrong place? Should there be a greater role from governments to release land for residential at an attractive price? When will the banks take on greater much needed finance for development risk? What alternative funding mechanisms might be a good option to help leverage debt into equity? Ultimately, before we can even begin to look at the future of purposely new-build residential stock across Europe, we need to address the basics of whether the numbers can work for all. Until then, institutional platforms and those precious global investors ready to deploy capital will remain on the outside, looking in on a very fragmented, undersupplied and critically overheating housing market.
Right? Not so; instead of capitalising on growth opportunities, Europe’s residential stock appears to have been completely bottled up. Developments have stalled, innovative brands struggle to gain finance and partner with the right investors, land and construction costs are sky high. Most crucially, few and far between projects have achieved scale and thousands of nuances and disparities in local planning, development and investment regulations have global investors clinging onto their capital rather than brave the risk curve.
The game changer...
If such sentiments are true, what will it take to uncork Europe’s residential supply and who will be the pioneers and what strategies might just see us through?
‘The game changer for me will be the operators, the institutional platforms that can build and run large scale developments’, remarks Owen Lynch, MD, LGL Trustees (GRI Club member). When we take the UK PRS market as an example, it still feels very immature in terms of being an institutional asset investment class.
‘Unlike the US and European markets where portfolios in excess of 40,000 homes are common, the number of active portfolios (excluding pipeline and planning consents) in the UK that exceed 1,000 homes can probably be counted on one hand. Efficient operators, achieving low operating costs and low void periods will be a significant factor in achieving the returns that long term institutional investors need. Part of this will come from scale, both in terms of individual locations and across the platform. Early adoption of innovative technology, to make the residents’ experience of dealing with the operator seamless will also be important.’
Such thoughts reflect the fact that we are far from being on the right track to unlocking supply. So much hangs on finance for the development of new stock and investors must think smarter and work harder to cater for demographic demands, and, more importantly their purse strings. This is easier said than done with costs being raised at every stage of the asset lifecycle - land, construction, operation, development and management costs which results in new-build rental stock that prices out the majority of the mid market.
In order to bring in more institutional platforms to unlock supply, perhaps we are starting in the wrong place? Should there be a greater role from governments to release land for residential at an attractive price? When will the banks take on greater much needed finance for development risk? What alternative funding mechanisms might be a good option to help leverage debt into equity? Ultimately, before we can even begin to look at the future of purposely new-build residential stock across Europe, we need to address the basics of whether the numbers can work for all. Until then, institutional platforms and those precious global investors ready to deploy capital will remain on the outside, looking in on a very fragmented, undersupplied and critically overheating housing market.