Residential is one of those segments easily associated with real estate by the general public. However, in the listed industry, many property companies operate a business model that goes far beyond the standard home-rental structure. Despite the fact that residential landlords have been long considered part of the traditional real estate players in North America and some parts of Asia, in Europe, this sector was represented by very few companies for several years. In the last decade, several new players have appeared, and the existing ones have expanded, bringing a lot of attention and investment capital into the residential scope and even creating new sub-sectors that now offer a significant diversity in terms of geographies, activities, fundamental drivers and social impact.
The FTSE EPRA Nareit (FEN) Developed Europe Residential Index was created in 2006 after the introduction of the sector classification to the global index series in 2005. At that time, the residential index represented around EUR 3.5 billion in free-float market capitalisation and was composed of three constituents only, all of them operating under the traditional home-rental business model. Now, almost 15 years later, the index is composed of 16 residential companies from Belgium, Finland, Germany, Ireland and UK, totalling EUR 76 billion in free-float market cap and representing some significant diversity in the property subsectors and activities.
In 2012, the residential properties owned by index constituents were worth EUR 34.8 billion, 13% of their total portfolio (EUR 275.4 billion). Excluding a few residential specialists in Austria, Germany and the UK, the biggest part of these portfolios was owned by property companies with a diversified strategy or by specialists on other sectors. In 2019, the picture looked utterly different: the total residential portfolio amounted EUR 156 billion, meaning 27% of a total of EUR 585.8 billion, where most of the properties were owned by residential specialists or diversified companies with a clear residential strategy on new sub-sectors such as student housing, social housing, serviced-apartments, care houses and multifamily developments.
The model expansion of Germany
The first decade of the 21st century has seen tremendous changes in the European real estate industry. The fast expansion of the property markets before 2007 and the introduction of REIT regimes in some of the largest countries brought massive incentives for property companies to grow. In Germany, the economic expansion had started to slow down in 2007, and some of the major cities in the country were already showing signals of agglomeration and limited housing supply. House investment fell from 7.8% of the GDP in 1994 to 4.9% in 2005, although bottoming out in 2006. Some companies saw this trend as an opportunity and came into the public markets to raise capital to support this new expansion. Three German companies joined the residential index that year.
Paradoxically, the two financial crises in 2008 to 2009 and 2011 to 2013 boosted the expansion of the residential property industry. Germany was seen as a haven in the middle of the turbulence. An exodus of talented workers started, moving from other European countries and the Middle East to the largest cities, which revitalised the population growth and the economy. New countries joining the European Union, a stronger presence of financial institutions in Frankfurt and Munich as well as the expansion of tech hubs in cities such as Berlin, Hamburg and Dusseldorf also played a key role in this new residential boom. Urbanisation rates improved from 73.1% in 2001 to 75.1% in 2014 and 77.4% in 2019, supporting not only an upward trend in both residential property prices and rents but also a strong performance of the listed companies, reflected in four new additions the residential index between 2009 and 2013.
The profound urbanisation mutations in Germany moved into some neighbour countries. The technological expansion, labour productivity, social services, quality of education and infrastructure conditions converted several Northern Europe countries into trendy destinations for new start-ups, financial institutions, students and qualified working force. At some point, cities like Stockholm, Dublin, Amsterdam and London were leading the new urbanisation trends and required new developments in both the residential and commercial property markets to satisfy the growing demand.
Following the example of their German peers, several property companies in those countries spotted exciting growth opportunities in both the real estate and the capital markets. Between 2016 and 2018, nine companies joint the index: four traditional landlords from Ireland, Sweden and Finland, three student housing specialists from the UK and Belgium and two more from a brand-new business model: social housing. This is how the FEN Developed Europe Residential Index became the biggest sector in the region in August 2017 and also surpassed the FEN Developed Europe Diversified Index in May 2020. Given its impressive performance and strong drivers, the residential sector also seems to have an outstanding future.
Some disruptive evolutions in the COVID-19 era
Property experts believe that COVID-19 may not be the last crisis impacting the sector, but it will be more disruptive than the global financial crisis. It had a catalyser impact on accelerating previous trends and caused more structural shifts, then cyclical ones. The pandemic has disrupted many aspects of real estate investment and transformed the way we live and work. Social distancing and working from home became the rule in most countries, which strongly impacted mobility in the office sector and reshaped the residential, as observed in graph 3. Growing teleworking and online shopping are expected to increase the time spent at home, thus changing preferences on ‘live-work-shop-entertain’.
No doubt that the pandemic is posing immediate challenges for the residential sector, but the main question remains: what might cause structural changes? If flexible working should becomea norm in some industries, it may have a deeper impact on the residential market, particularly in the large cities. The average commuting time might affect location preferences, should people go to their office only a couple of days a week, thus shifting the urban vs suburban preferences. The cities attracting talent, offering new jobs and a vibrant urban lifestyle can still be the hot spots for new residential developments and attractive investment opportunities.
Currently, there is a growing perception of ‘property as a service’, raising further the appetite for the residential sector. Most of the European residential companies have stated strong operational performance with limited impact from the pandemic, seeing small changes in occupancy rates and high rent collections. Many of them also kept unchanged their performance guidance for 2020 and 2021, revealing significant stamina as rising unemployment and weaker incomes might affect affordability to pay rents, which kindles optimism for the post-pandemic era. The near future remains full of uncertainty, but residential companies have proved to be resilient and persist at the forefront of the new trends in real estate.