Residential real estate is the world’s largest asset class by value, and arguably one of the, if not the, oldest.
People needed somewhere to live long before they needed a place to work, shop or even money.
Commercial property sectors such as offices and retail are dominated by institutional investors such as pension funds and insurers. By contrast, housing markets are marked by fragmented ownership, with homes typically owned by private individuals rather than corporations. Single-family homes (both rented and owner-occupied) make up 98% of Europe’s residential market.
Until now, when institutions have invested in European residential real estate, they have focused on multifamily housing (rental apartment blocks), which make up just 2% to 3% of the overall market. In some markets, like the US, Germany and Scandinavia, institutional ownership of multifamily homes is well established. Yet even in those countries, most housing stock is owned by individuals.
This presents a huge untapped opportunity for institutions to access existing granular residential assets that promise higher yields than fixed income, while also offering attractive returns uncorrelated to equities – like multifamily housing does.
The disaggregated and granular nature of single-family rental (SFR) reduces asset-level risk. This means, unlike multifamily, you don’t have a significant sum of capital tied up in one building in a particular location. By acquiring existing homes, you are also avoiding taking on planning and development risk.
There is a strong ESG angle to SFR, too. Retrofitting Europe’s housing stock will be key to meeting governments’ ambitious net zero targets. A thriving SFR sector could harness the power of institutional capital to upgrade existing homes to bring them to modern energy efficiency and sustainability standards.
Like with most things, the UK is beginning to follow in the footsteps of our US cousins. Across the pond, the SFR market is well established. SFR took off in the US after the global financial crisis as investors rapidly purchased foreclosed homes.
For SFR to succeed in the UK, investors need to embrace tech and data. At IMMO, we use tech to filter £500bn of European property a month down to the most suitable assets for investment, looking at factors such as asset liquidity and population growth that accurately predict rental demand.
We then analyse a shortlist of properties in person and sign homes in days not months. All the properties we buy are ‘vacant on possession’, meaning we can immediately refurbish them and bring in tenants.
This is not about profiteering from the housing affordability issues most cities face. We ensure our rents are affordable to local tenants, rather than charging the kind of premium rents typically associated with build-to-rent schemes. This widens our customer pool base and de-risks our portfolios, while giving our investors access to long-term steady income streams.
Residential for rent demonstrated its resilience during the pandemic compared with traditional property investments such as offices and retail. This, alongside attractive current and forecast demand/supply dynamics and the promise of liability-matching income streams, means the sector continues to attract a growing weight of institutional capital.
The real untapped opportunity lies in the housing we already have, not building new apartment blocks.
Samantha Kempe is co-founder and chief investment officer at IMMO