Residential Investment Market in Europe

Eri Mitsostergiou – European Research

European Residential Investment agenda

The sectors The drivers The prospects The hotspots

2

The ‘fourth’ sector?

The rising importance of Alternatives and the Residential sector

3

1

Alternatives are becoming mainstream…

4Savills

Why?

• Diversification

• Better returns

• Lower volatility

• Good fundamentals

• Stable long-term income

• From a quarter to a third

of total activity

24%27%

23%

29%31% 31%

34%32%

29%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012 2013 2014 2015 2016 2017 H1

Bill

ion

s

Investment share in Alternatives

Alternatives Total Investment Share of Alternatives

…driven by the residential sector

5Savills

What is residential?

• Family housing

• Student housing

• Senior housing

• And other emerging

concepts (multi-, co-

, micro- …)

48%

50%

57%

67%

63%

45%

45%

[VALU

E]%

60%

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 2015 2016 2017 H1

Bill

ion

s

Residential share of Alternatives

Residential Investment Other

Over 80% of capital only in four markets

6Savills

Where to?

• Germany, Sweden and

Netherlands have

established institutional

residential markets

• UK has established student

housing sector

2%4%

5%

5%

9%

9%

17%

46%

Residential investment destination 2009-2017

Poland

Norway

Italy

Ireland

Austria

Spain

Finland

Denmark

France

Netherlands

UK

Sweden

Germany

Over 70% of capital only from four countries

7RCA

Where from?

• Over one third has been

cross border investment

• US investors expanding

outside their home market

• European investors

focusing on their home

markets and increasingly

going cross border

38%

12%9%

13%

3%

6%

9%

4%4% 2%

Residential investors by origin 2009-2017 United States

United Kingdom

France

Sweden

Singapore

Germany

Canada

China

Luxembourg

Belgium

The drivers

What drives investor demand for residential?

8

2

Urbanisation and demographics

9

Structural rather than cyclical

Source: Oxford Economics

• People move in the big

cities – apartments

• Ageing population –

senior housing

• Shrinking household size

– micro living

• Rising student population

– student housing

Student housing – Increased student mobility and low supply of quality stock

10Savills

Student housing supply ratios

• Rising student and

international student

numbers

• Rising number of ETPs

Multifamily – House prices are rising and renting is becoming appealing…

11

Rent vs Household Income

Source: Oxford Economics, OECD

• House prices have been

rising by 4.1% pa on

average over the past

five years

• Affordability issues are

pushing people

(especially younger ones)

to the rental market

22.4

%

30.2

%

22.6

%

32.1

%

25%

22.1

%

19.8

%

30.5

%

30.9

%

38.2

%

28.8

%

29.2

%

23.1

%

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Germ

any

Neth

erl

ands

Fra

nce

Spain

Italy

Austr

ia

Irela

nd

Sw

eden

Fin

land

Norw

ay

Denm

ark

UK

Port

ugal

Share of Rent from Disposable Income (2016)

Average Household Disposable Income (2016)

House price index 2017 (r-h-axis)

…still low ratio in most countries so there is scope for increase

12

Current Stock

Source: Housing Europe, Euroconstruct

• In the US market

equilibrium is considered

when 30% of the

population is renting

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Fin

land

Spain

Port

ugal

Italy

Irela

nd

UK

Fra

nce

Austr

ia

Sw

eden

Neth

erl

and

s

De

nm

ark

Germ

any

PRS Stock / Population (2015) Tenants at market prices (r-h)

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Germ

any

Neth

erlands

Fra

nce

Spain

Italy

Austr

ia

Irela

nd

Sw

eden

Fin

land

Norw

ay

Denm

ark

UK

Port

ugal

Average Capital Growth (2006-2015) Average Rental Growth (2006-2015)

Residential markets have delivered attractive returns

13

Multifamily Capital and

Rental Growth

Source: IPD

• Rental growth has been

the largest in

Denmark, Finland and

Austria, while rents

declined in Spain and

Portugal.

Residential yields have been compressing over the past five years…

14

Multifamily Yields

Source: Savills

• Multifamily yields have

compressed significantly

over the past five years

• The only exception is

London as we have seen

a softening of yields this

year

-0.0200

-0.0150

-0.0100

-0.0050

0.0000

0.0050

0.0100

0.0150

Am

ste

rdam

Du

blin

Berlin

Co

pe

nh

age

n

Ham

burg

He

lsin

ki

Lo

nd

on

Munic

h

Sto

ckholm

Vie

nna*

2012-2017 multifamily yield compression

…but still offer a good spread over long term interest rates

15

Multifamily Yields H1 2017

Source: Savills

• Only in Helsinki, Madrid

and London multifamily

yields are higher than

offices

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

Sto

ckholm

Berlin

Paris

Oslo

Am

ste

rdam

London

Madrid

Copenhagen

Dub

lin

Hels

inki

Net Multifamily vs. Net Office Yields Net Multifamily vs. Bond Yields

Prime Net Multifamily Yields

The prospects

Is residential going to continue to perform?

3

Investor demand should remain strong

17RCA

Potential market size

• Residential investment

volumes in the US are four

times larger, while

population is almost a third

lower

Some further yield compression is possible…

18

Prime net Multifamily Yields

Source: Savills

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2010 2011 2012 2013 2014 2015 2016 2017

Amsterdam Dublin Berlin

Copenhagen Hamburg Helsinki

London Stockholm Vienna*

…although interest rate hikes might limit it

19

Long term interest rates

Source: Oxford Economics

• Low interest rates due to

stay low for at least

another year

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

10-Yr Bond Yield (weighted Euro avg. %, eop)

Rental growth will be at least in line with inflation

20Savills

Multifamily rental growth

• Residential sector rental

growth is indexed linked

protecting real income

from inflation

-15%

-10%

-5%

0%

5%

10%

15%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Average prime multifamily rental growth

Inflation projection

The hotspots

Which are the most attractive markets for residential?

4

Capital MarketsDemographics

We scored the markets based on the following criteria…

22

Spread between Multifamily and Office Yields

Spread between Multifamily and Bond Yields

Prime Multifamily Yields

Residential Investment Volume

Rental Growth

Capital Growth

GDP

GDP per Capita

Consumer Spending

Unemployment

House Price Index

Residential Stock / Population

PRS Stock / Population

Number of Completions

Tenants at Market Price Rent

Total Population

Urbanisation growth

Average Household Size

Average Household Disposable Income

Price to Income

Share of High Income Households in PRS

Share of Rent from Disposable Income

Market ConditionsEconomics

Hotspots per category - Economics

23Oxford Economics

Economic growth prospects

• Which countries will see

the highest economic

expansion

• Unemployment

conditions

• Consumer spending

growth

• Affluent countries

Hotspots per category - Demographics

24Savills

Urbanisation is the driver

• Population growth in the

largest cities

• Shrinking household sizes

• Affordability

Hotspots per category – Market conditions

25Savills

Demand vs supply

• Supply of residential

stock

• Development trends

• Demand for rental

Hotspots per category – Capital markets

26Savills

The most liquid markets

• Size of investment

market

• Spread of yields over

bonds and traditional

sectors

• Capital and rental growth

The combined results

27Savills

Multifamily benchmark

*Size of bubble is 2016 multifamily investment volume

• The established markets

have further growth

potential

• Opportunities can be

found in smaller

markets, some of them

are quite dynamic

Portugal

Finland Germany

Austria

Denmark

UK

Italy

Spain

France

Netherlands

Norway

Sweden

Ireland

15

17

19

21

23

25

27

29

31

33

35

10 15 20 25 30 35 40 45

Mark

et conditio

ns

Demand drivers

Small but dynamic

Established

and

growing

Developing with

opportunities

The growing cities

28Oxford Economics

Population and Economics

• Growing cities include a

mix of capitals as well as

second tier cities

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5%

10%

15%

20%

25%

30%

35%

40%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2016-2

6 G

DP

incre

ase

2016-26 Population increase

Summary

29

Investment in residential will be increasingly a strategic choice for investors:

• Supporting demographic trends and growth potential of the market

• Diversification benefits

• Higher yields (although compressing)

• Indexed rental uplifts

• Long leases

• But less transparency and maturity and lack of performance index

Look for the cities

• With growing population

• With growing employment opportunities

• With growing student numbers

• With good infrastructure

• With good quality of life

But keep in mind that each jurisdiction is different

• Lease structures

• Rental regulations

• Local demand and supply characteristics

• Planning

Thank you

30