Commentary

Living takes European investment top spot for the first time

Sector viewed as safe as houses by investors seeking to diversify

August 10, 2023
Contributors:
  • Nick Whitten

For the first time ever, quarterly EMEA multi-housing investment volumes have exceeded EMEA office investment volumes.

Multi-housing – encompassing multifamily and single family rented homes, as well as purpose-built student accommodation - saw €8.5bn invested in Q2 compared to €7.8bn for offices.

The gap has been narrowing for some time between offices and living as emerging markets and new sub-sectors in living have propelled deal-making. Germany has always dominated on the living investment front and deals continue despite a challenging environment. Meanwhile private renting continues to grow in the UK, which has seen the once-nascent build-to-rent sector grow and diversify to include single family rental and co-living.

Now for a caveat. A big part of living taking top spot for the first time is to do with how hard the mighty (offices) has fallen. The volumes for offices represent a 67% year-on-year decline compared with a 41% year on year-on-year fall for multi-housing. While living saw the largest share on record in Q2 at 32%, offices fell to the lowest proportion, at 25%. 

The last time quarterly investment volumes for offices were so low was during the Global Financial Crisis (GFC) 15 years ago. In the last 10 years office quarterly investment volumes have only dropped below €15bn on only three occasions – Q2 2020 at the height of the Covid pandemic and then the two most recent quarters Q1 and Q2 in 2023.

Over that same period, multi-housing has only been above €15bn on 8 occasions, and five of those quarters have come since Q4 2020. And this is an important point - the direction of travel. There is no doubt office investment in Europe will bounce back, but to what extent, and will living investment keep pace.

Lessons from America

As the chart below shows, offices was clearly the largest sector in the US going into the GFC, but coming out of that period of significant economic uncertainty, multifamily started vying for top spot. Typically after any economic uncertainty investors will look to diversify their portfolio, often towards more secure or resilient assets. Living investment was seen as being as safe as houses… pardon the pun… and by 2015, multifamily had become the US’s undisputed largest real estate investment sector.

Are we now at the beginning of this trend occurring in EMEA following the recent period of economic uncertainty?  Demand for rented homes has never been higher with affordability issues making it ever harder for people to buy a home. As a result, the appetite from investors for living assets is at an all-time high in Europe.

The biggest constraint on satisfying the investor appetite may well be the on-going need to build assets rather than acquiring existing stock. New housing supply remains subdued across Europe and crucially well below meeting housing demand. Construction costs are at an all-time high. On average European residential construction costs have continued to grow in H1 2023, after plateauing towards the end of last year. However, the rate of growth is slowing, with an average of 4% in May, compared to 9% a month earlier.

This fundamental undersupply keeps the investors coming. But with building permits for new homes down 45% since the start of 2023, many investors may continue to go hungry for living assets for some time yet.

A version of this article first appeared on React News.