There’s little doubt that the current level of pent-up demand in the real estate sector is so intense that the market is bracing itself for a summer of activity. In the face of a year without international travel, most global investors have been playing a long waiting game in an attempt to either market their assets at the right time or to even find an opportunity that’s on the market at all.
While there have of course been transactions in the last 12 months, the sum of dry powder waiting to target real estate is significant. Although core offices in central locations will remain attractive, wider socio-economic shifts as a result of the pandemic have ruffled a few feathers with regards to the status quo.
Logistics have, naturally, become an obvious choice with millions more consumers shopping online while bricks and mortar retail remains closed. Nevertheless, with its strong social fundamentals, it is the operational residential sector that has been the dark horse throughout the race to become a 'Covid-19 winner'.
What has been truly remarkable is that this historically 'alternative' asset class accounted for 27 per cent of real estate investment globally in the first three quarters of 2020 – up from just 16 per cent a decade ago. Our research also demonstrates that multifamily – the largest sub-sector in the operational residential market – proved the most resilient last year and was the second most active sector in 2020, capturing €46 billion and pushing yields as low as 3.24 per cent.
So with investors cottoning onto the fundamentals and long-term returns of not just multifamily, but its cousins – senior living, purpose-built student accommodation, co-living, and so on – can we expect to see a boom in the market?
There will undoubtedly be a weight of capital that might not have traditionally considered the sector; Middle Eastern and Asian investors in particular will be looking to local partners to provide comfort investing in this new asset class. Throughout the pandemic, it’s clear investors with local employees or partners have benefited from the ability to conduct asset inspections and ultimately complete on transactions but we expect to see familiar European investors launching both new and additional 'living' specific funds. European Residential Income Fund II, for instance, recently launched by Round Hill Capital, has already completed on deals comprising over 1,100 units in the Netherlands and Germany this year.
Inevitably, with heightened interest we anticipate further competition around pricing which has already resulted in above guide price transactions throughout Europe while simultaneously driving yield compression. As vendors look for the right time to market their assets, it’s likely we’ll see a lot of owners looking to improve operational efficiencies and considering refurbishment, not only to improve their quality, but to comply with the ESG requirements of target investors.
For the operational residential sector, this could just be the ticket for it to be become the ‘core’ asset class that we’ve all been waiting for.
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