Investors in the European living sector are seeing a strain on returns, due to rising borrowing and operating costs as central banks struggle to control inflation.
As a result of these pressures, many investors are pushing their pricing out and, looking ahead, may need to match increasing borrowing costs with softening entry yields in order to maintain minimum return thresholds.
It is now clear that real estate investment is moving from a capital growth environment towards one which is focused on rental income stream improvement as the key driver of returns.
What does this mean for the living sector?
Well, the living sector is actually in a good place to deal with these conditions, benefiting from strong fundamentals, especially when compared with other real estate sectors:
- Existing stock Europe has a shortage of good living space in the right locations. This is evident from the very high levels of occupancy achieved on institutionally owned and managed accommodation over the last year, as well as the continued upward pressure on rents.
- Supply constraints There simply is not enough new stock being built to meet the high level of demand, and so supply/demand restraints will continue to prevail.
What does this mean for investors?
For stock that is already owned, landlords should focus on driving efficiencies in operations, while maintaining good levels of customer/tenant care. This is of course a balancing act that requires a skilled team to accomplish.
For new deals, investors may want to move up the risk curve to consider earlier investment in development and operations. An often-used phrase is ‘build to core’ and this has to become the mantra for investors. This not only allows them to take greater control of delivery and management, ensuring ESG-compliant investments, but it will also help deliver the most sought-after of commodities: increased returns.
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