The resilience of the European real estate market amid economic and geopolitical challenges is a topic of great relevance and interest for investors and market observers. A PATRIZIA strategist has provided an assessment based on a variety of factors and market indicators.
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The transaction volume and segments of the residential real estate market
Amid a time of economic turmoil caused by inflation and rising interest rates, Dr. Marcus Cieleback, Chief Urban Economist at PATRIZIA, conducted an in-depth study of the European residential real estate market. His analysis, titled “European Residential Markets 2023/2024,” highlights the resilience of the sector, even in a climate that has left some developers struggling and planned projects either canceled or postponed.
Dr. Cieleback begins with a look at the global and European transaction volumes in the residential real estate sector, which fell significantly in 2022 compared to the previous year. However, he emphasizes that despite the general decline, the market in Europe is still characterized as “clearly more cautious, more cautious”. Although the volume of transactions has decreased, he points out that they are still taking place, but at a more specialized, informed and much more specific level. The relative robustness of the European market is also underlined by the continued international investment interest in EMEA, which sees European residential real estate as an attractive investment case with good diversification and stable return opportunities.
The analysis delves further into the specific segments of the residential real estate market, particularly niche uses. Student housing is highlighted here, the transaction volume of which has only fallen by 14 percent. Cieleback interprets this resilience as an indicator of the fundamentally positive market conditions that continue to exist despite the current economic challenges. He cites increasing demand due to megatrends such as urbanization and demographic change, which, however, cannot be adequately served due to a lack of construction activity. This discrepancy tends to lead to an increase in prices and rents, it goes on to say.
The study places particular emphasis on the tight supply, which is identified as a crucial factor in the resilience of the rental market. Cieleback emphasizes that this tight supply provides stable income streams and attractive risk-adjusted returns for institutional investors in an inflationary environment. He sees high demand, rising interest rates and growing requirements for sustainability aspects of new buildings as key drivers for a solid rental market.
Supply gap, ESG and demographic change
Another key theme of the analysis is the shrinking number of completions and project pipelines in Europe, with the exception of Ireland. The resulting supply gap particularly affects low- and middle-income households and places the responsibility on both investors and project developers to fully take ESG (environmental, social, governance) criteria into account. The challenge is to implement regulatory changes dynamically, which requires greater agility in planning, but should not prevent long-term investors from investing and acting successfully based on a deep understanding of the market, it goes on to say.
Demographic change and the increasing number of one-person households, which increased by an average of 7.2 percent in the EU between 2010 and 2020, with a notable increase of 19.5 percent in one-person households, is seen as an additional Opportunity identified in the European residential real estate market. Cieleback notes that this group has a greater demand for rental housing across the life cycle, particularly young and urban employees who are in the early stages of their careers and whose jobs may change in the future. Changes in living circumstances, such as family planning or career changes, can also lead to moves, and in many cases the new apartment is initially a rental apartment. It is therefore essential that rentals are attractive across the board in order to meet these needs.
Cieleback points out that despite some challenges, the fundamental factors of the housing market have remained largely unchanged. He emphasizes that the market is still characterized by tight supply and rising rents, which offers a low correlation to the financial market and a high degree of security against inflation. Even as bond yield spreads fall, the true quality of a property is revealed in its stability, location and the social impact it has on its location. Some European cities, such as Malmö, Vienna, Helsinki, the Randstad region, the top seven German cities or Paris, as well as Barcelona and Dublin, are identified by Cieleback as having structural opportunities.
The conclusion and final findings
In the context of demographic change and the growing number of one-person households, the analysis also recognizes cross-border advantages in concepts such as student living and senior living. While metropolises such as Paris, London and Madrid attract many international students, Vienna and Stockholm, with a more domestic student population, are less dependent on foreign students. These differences in student housing could reveal opportunities for long-term investments in specific geographic areas.
Cieleback concludes that the European residential real estate market remains a solid foundation and offers opportunities for long-term investors, provided they know where to look for these opportunities. He emphasizes the importance of a sound understanding of the market and regional dynamics in order to make the best possible use of the available opportunities.
In conclusion, Cieleback’s comprehensive analysis presents an optimistic perspective on the resilience of the European residential property market, despite the current economic uncertainties and challenges. By looking at various market segments and demographic trends, the research highlights the long-term investment opportunities and continued attractiveness of the residential real estate sector for investors willing to adapt to the market’s specific needs and opportunities. The analysis also sheds light on the social responsibility of investors and project developers to address ESG criteria and respond dynamically to regulatory changes in order to operate successfully in this sector.
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