Momentum is picking up: residential property is in demand and set to become a dominant asset class in the European investment market. Institutional real estate investors like Union Investment know that residential buildings don’t just meet one of society’s basic needs, they are also the perfect complement to commercial properties. The underlying strategy is that increased investment in residential property further diversifies the portfolio and helps to stabilise fund performance. Back in 2019, Union Investment expanded its existing investment strategy, which was primarily focused on commercial space, to include European residential property.
“The institutionalisation of European residential markets has advanced significantly over the past few years,” says Friedrich Georg Warmbold, Head of Investment Management Residential. “We started out by forging closer ties with developers who are active in both the office sector and the residential sector. In 2019, we entered Amsterdam’s residential market with the acquisition of the Yvie project.” Since then, Union Investment has significantly accelerated its acquisition activities. “We have secured attractive, sustainable new builds in Amsterdam, Helsinki and Dublin for our funds and committed around €1.2 billion in capital,” says Warmbold. A total of ten new builds have been acquired since 2019, with individual investments ranging from €70 million to more than €220 million.
New build projects offer sustainable rental growth
The 2,400 new apartments that will be let when the partially mixed-use projects are completed promise attractive returns and stability, especially in times of elevated economic uncertainty. “The Covid-19 pandemic showed that there is relatively little correlation between the commercial property market and the residential market,” notes Warmbold. “Rising interest rates have boosted the Europe-wide trend towards renting. Increased construction costs, economic uncertainty and low new construction starts are also exacerbating already high excess demand. Overall, this is primarily being reflected in rising rents and in low vacancy rates in popular metropolitan areas.” The fund managers of Union Investment’s retail funds are aiming for up to 10 percent of real estate assets to be allocated to the European residential segment (excluding the DACH region). “A further €2 billion will be invested in the medium term,” says Warmbold.
The head of the new Residential investment management team began his career at Union Investment more than eight years ago, initially working in the office property segment. In September 2021, Warmbold took over as Head of Residential and assembled a young team of five expert investment managers. Patrick Weil has been part of the team for around two years, ever since it was first set up. Having made a number of successful acquisitions in Dublin, he has in-depth knowledge of the Irish residential market. In 2022, the Residential team was expanded to include investment managers Maik Schott for the Nordic markets, Kai-Leopold Blumberger for the Benelux countries and Anita Pudane for Southern Europe. The average age of the team is 33 years – an indication that Union Investment is serious about its HR policy of promoting the next generation of talent. “We like to give people responsibility but also support them where needed. That opens up a wide range of development opportunities,” says Warmbold, speaking from his own experience.
Sustainable residential buildings in demographically attractive cities
The investment team concentrates on thriving metropolitan areas with strong demographics in selected national markets. The main focus is on the already successfully developed residential markets in Dublin, Helsinki and Amsterdam and other major cities in the Randstad region, in the western Netherlands. The team also has Denmark, Sweden, Spain, Italy, France and the UK in its sights. In Paris and London, the Residential team benefits from on-site support provided by Union Investment’s local offices.
The residential properties in Union Investment’s portfolio are aimed at tenants in the middle and high income brackets. High construction quality and prime locations are essential in this segment. Accordingly, the investment focus is on sustainable residential buildings with good infrastructure links, particularly new builds and development projects. This requires a reliable international network of developers, real estate agents and portfolio managers in each national market. It is crucial for investment managers to select experienced, creditworthy partners for forward purchases and forward funding deals.
Regional differences call for highly detailed knowledge
“It’s important to remember that European residential markets vary considerably,” says Warmbold. High barriers to entry include hedging costs to protect against currency fluctuation, unclear legal regimes and increasing regulation of markets, as well as transaction activity that is dominated by private or local players. Smaller units and outdated housing stock that does not meet the funds’ acquisition criteria can also limit opportunities. Sometimes there is no adequate property management data available. “That can make investment more difficult, especially in countries like Spain and Italy,” says Anita Pudane. It is an advantage if high sustainability standards are already required by law, such as in the Netherlands. “High requirements make it easier for us to achieve taxonomy compliance in our funds,” says Kai-Leopold Blumberger.
Investors also need to take the different preferences of occupiers into account. Tenants in Finland expect a sauna in the property as standard, while those in Spain value a generously proportioned terrace, say Maik Schott and Anita Pudane. “In London and Dublin, it’s easier to let apartments that are fully furnished in a contemporary style,” adds Patrick Weil. In the Netherlands, floor coverings are often not included in the basic fit-out, but Union Investment’s Dutch projects intend to set new standards in this regard.
Although there are many differences, the investment managers also see common trends across the European residential sector. For example, living spaces are becoming smaller for economic reasons. Nowadays, tenants also expect flexible use options and individual services. These include local co-working spaces for remote working and animal friendly environments, and possibly even a dog shower. “Our 8th Lock development in Dublin is state of the art and addresses these trends,” says Patrick Weil. “Sustainable residential neighbourhoods that include other uses are viewed as being very well positioned for the future,” notes Warmbold.
Pricing in European residential investment markets
Acquisition opportunities in European residential markets are still temporarily restricted due to the current pricing uncertainty. Warmbold has already observed some repricing: “Depending on the national market, we’re seeing yield adjustments of up to 100 basis points. However, there’s probably still some way to go. As an equity-rich investor, we are expecting good buying opportunities in 2023, including in new national markets.”
Words by Elke Hildebrandt, photos by Patrick Ohligschläger