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In 2020, the volume of investments in European commercial and residential real estate has significantly declined. According to the report by Savills, it has amounted to approximately € 257 billion, which is 18% less than it was in 2019, and 8.5% less than the average volume of investments over the past five years. At the same time, the sector of apartment buildings has become the second most active – investors have poured € 46 billion in this sphere. Part of the capital has flowed into it from other traditional segments, most commonly chosen by professional investors (offices and retail premises).
The reasons are quite clear. The pandemic has led to a slowdown in business activity; people tend to spend less time outside their homes and have started to pay increased attention to their accommodation. Investors have already reacted to this change. Thus, the share of investment in offices fell from 39% in 2019 to 34% in 2020. Meanwhile, there was an increase in the sectors of logistics (from 12 to 15%) and rental houses (from 14 to 18%).
This situation has happened in countries with established markets of multi-unit apartment buildings: the share of such properties in Denmark has reached 53% of the total investment volume, in the Netherlands - 39%, in Sweden - 28% and in Finland - 18%. In small markets where the sector is developing rapidly, the interest of the investors in apartments has reached exceptionally high values. For example, in the Czech Republic, due to a large portfolio transaction, the volume of funds invested in multi-unit apartment buildings has reached 50% of the total investment flow, in Ireland the figure has increased to 39%, in Spain - to 29%.
Germany remains the largest market in absolute terms. In 2020, 40% of the capital invested in multi-unit apartment buildings happened to be here. It is followed by the Netherlands, Sweden, Denmark, Great Britain and Spain. In 2020, the activity in the markets of the United Kingdom, France and Denmark has remarkably increased.
The most popular countries in Europe for investment in multi-unit apartment buildings:
| Country | Market share, % |
| Germany | 40 |
| The Netherlands | 15 |
| Sweaden | 12 |
| Denmark | 9 |
| The UK | 6 |
| Spain | 6 |
| France | 5 |
| Norway | 3 |
| Ireland | 2 |
| Finland | 2 |
Source: Savills Research
Intense competition has led to a decline in rental yields. Since 2012, the return on investment in apartments has been gradually decreasing, and in 2020 it has reached its minimum.
On average, the owner of an apartment building returns 3.24% of the value of the asset per year. The return on premium housing ranges from 2.4% in Berlin to 5.0% in Warsaw, and in most markets it ranges from 3.0% to 3.5%.
Rental yields for premium housing in European cities, % per year
| City name | 2015 | 2020 |
| Berlin | 3.39 | 2.40 |
| Paris | 3.40 | 2.80 |
| Amsterdam | 4.04 | 3.00 |
| Madrid | 3.30 | 3.00 |
| Helsinki | 4.10 | 3.25 |
| Copenhagen | 4.50 | 3.50 |
| Stockholm | NA | 3.50 |
| Oslo | NA | 3.50 |
| Dublin | 4.75 | 3.60 |
| London | 4.00 | 3.50 |
| Warsaw | NA | 5.00 |
Sourse: Savills Research
Restrictions and delays in construction over the past year may further increase the misbalance between the supply and demand for professionally managed apartment buildings in major European cities. Competition for income-generating assets is expected to be fierce and prices may continue to rise, especially in markets where the supply of rental housing lags behind the demand.
Economic uncertainty is likely to increase the demand for rent, but the prospects for the growth of rental charges may be dim until the confidence of the households in their finances is restored. Nevertheless, in most markets, rental incomes of property owners are protected from inflation, which ensures stable cash flow.
According to Savills experts, the stability of this sector and the emergence of new entrants will make apartment buildings one of the most attractive types of assets on the European real estate market.
There are frequent concerns that the rise of corporate investment in urban residential real estate is decreasing the affordability of apartments. Therefore, the authorities in many cities are introducing legislative measures to protect the tenants. However, these actions are often criticized for their negative effect, as they hold back the development of the sector and actually reduce the supply.
On the other hand, moderate control over the rate of price increases on the rental market provides stability for the tenants and the investors who know what to expect. Recently, rental rules have been tightened in such cities as Paris, Berlin, Amsterdam and Copenhagen.
By the way! On April 15, 2021, the Superior Court of Germany has declared the «freeze» of rental charges in Berlin illegal. Probably, this will lead to an increase in rental rates, and hence the profitability of apartments in the city.
Usually, the restrictions apply to new rental agreements for secondary housing. A lot of flexibility remains in relation to new developments or reconstructed houses. They are guided by a comparable rental charges in a given city - in most cases it is not allowed to significantly exceed it, and the possibility of revision, as a rule, is associated with inflation. In some regions, such as Denmark and Sweden, investors were able to invest in the reconstruction of old objects and gain profits, but most of the professionals focus on new buildings.
Despite the crisis in health care that has largely changed people's habits, investors remain interested in apartment buildings. The reason is the good overall performance and sustainability of this sector.
Accommodation remains a basic human need, and during the pandemic, the rate of rent capture in the residential sector exceeded 80% - more than in other segments of real estate. In addition, during periods of economic instability, the demand for rent grows as people feel less confident about their future income, and mortgage conditions become more stringent.
One of the key factors determining the demand for rent is the sharp rise in prices for the purchase of real estate in Europe. Since 2015, the average prices for apartments in many markets have been growing faster than the average income of the residents. The largest gap has been recorded in the Netherlands, Germany, Spain, Austria and Ireland.
This fact has led to an increase in rental rates. Since 2010, the highest increases of rental rates have been seen in the markets of Spain, Denmark and Ireland.
In addition, housing is rented by more than 35% of the population in a number of countries - these are Germany, Austria, Denmark, Sweden, France and the United Kingdom. Most of these countries have trends to urbanization and movements of the population to the capitals. Therefore, the number of households may grow by 5% or more in such cities as Stockholm, Copenhagen and Helsinki over the next five years.
The health care crisis is also affecting the type of housing in demand. Some buyers, especially families with children, are looking for townhouses on the outskirts of cities or in the suburbs with good transport links, fresh air and access to infrastructure. On the other hand, young people still like to live in apartments in the city center, close to work and amusements, especially where you can walk or ride a bike.
However, health and balance between work and recreation are becoming a priority for all categories of residents. In order to reverse the trend of populating the suburbs, large cities will need to increase their appeal. Cities that are able to provide more open spaces, green belts, flexible jobs and comfort will benefit.
For example, Paris and Milan are developing the concept of "15-minute cities" with walking distance to basic infrastructure: it is planned to increase the number of bike paths and redevelop public spaces. This will reduce the dependence on cars. Barcelona intends to transform the city center into a pedestrian-friendly green area over the next ten years and to limit the use of cars.
The buildings will also change. Residents will need more open spaces and work spaces, access to greenery and amenities. More attention will be paid to the design of apartments and common facilities, as well as to the interaction between management companies, residents and neighbors. The focus will also be on ecology and energy saving.
The pandemic has hit the economy and employment, the income of many families has reduced, and now they are not able to cope with high rentals. Assuming that households can spend a maximum of 30% of their income on rent, you can see how housing affordability varies across Europe.
The imbalance between the supply and demand has led to higher rental rates over the past few years. In such cities as Copenhagen, Amsterdam, Dublin and Paris, the average rental price for a one-room apartment is already at least one third of the average disposable income of a family. This means that the demand for more affordable housing is high and the prospects for further growth of rental rates are limited.
The public sector or housing associations are usually responsible for providing affordable housing to the population. However, due to the pandemic, the budgets of many cities have a shortage of funds for this segment. In some cities, such as Dublin, Amsterdam and Madrid, the public sector is working with investors and developers to build affordable housing, in particular by offering vacant land plots and providing long-term reliefs. In this regard, developers and investors are beginning to look at economy-class housing as a source of stable profit and the realization of their social responsibility.
P. S. The statistics provided in this article refer to professional investors (various funds) who operate with large sums of money and finance large-scale projects. But the principles of transactions with small apartment buildings or even individual apartments do not differ significantly. Therefore, all the data collected by analysts will be useful to private investors as well.
