Following a phase of reflection on their current portfolios and the initial impact of the Covid-19 pandemic on their strategies, many real estate investors are now asking the question: what will happen to pricing?

This is particularly the case for the less traditional sectors such as purpose built student housing, senior living or multi-family where valuers have less of a reference point over several decades compared with, for example, the offices sector.

However, we’re continuing to see a number of high-profile transactions complete such as in the Netherlands where PATRIZIA AG sold a portfolio comprising 2,023 units, 96 per cent of which are multi-family homes, to Heimstaden AB, the Swedish listed real estate investment company, in the region of the asking price. Similarly, there are a number of high profile student housing and senior living portfolios that are completing now at the levels that would be expected pre-Covid-19.

The next step for the investment markets is going to be interesting from a pricing perspective as new bids are called on a handful of opportunities where there is a much greater understanding of how Covid-19 will continue to affect our lives. These processes will start to show us what investors really think of the ‘new world’.

Pricing is, in part, an output of return expectations, risk adjusted of course, and – for the most part – investors still have the same return requirements as they did at the start of the year and the capital in place to invest. Where we are seeing an impact on pricing is therefore less about changing return requirements and more about a softening of underwriting assumptions as companies strategise on the rental levels and occupancy rates in a post-pandemic world of occupational real estate.

Underwriting is also softening because banks are shying away from new opportunities or new relationships, affecting lending margins. There’s also another threat to underwriting strong pricing: a more pessimistic view of rental growth assumptions.

Rental growth in particular is so often the driver that attracts investors to the ‘living’ sector, but on a more positive note, most commentators believe that softer rental growth is likely to be short lived, perhaps just for one to two years. After all, the long-term fundamental strength of the sector remains: there isn’t enough good quality housing stock being built to accommodate the shifting demands of populations across Europe.

Uncertainty in any market will create volatility, but we have to have an eye on the medium- and long-term fundamentals of strong demand driving the multi-family and student housing sectors. Student housing also has the benefit of being resilient in downturns, as the driver of demand is education and a good quality higher education is always a valuable commodity.

As long as demand remains high, prices will too in the medium term, especially for prime located development sites or completed assets in close proximity to Europe’s top universities and city centres.

So while many buyers may be hoping for a bargain, ongoing competition for the top assets is likely to continue as and when they become available.

Further information

Read more: How resilient is real estate during the Covid-19 pandemic?