Home advantage: investing in Europe’s residential real estate

Housing has become a major priority for governments across Europe. Despite this, supply often fails to keep pace with demand, particularly in Europe’s most popular cities.

Planning issues, the pandemic and lack of financing have further exacerbated the shortage in recent years. Moreover, many of the buildings that are available do not meet today’s standards of quality accommodation, often lacking in strong environmental credentials, good amenities and fast transport links.

This creates an opportunity for real estate investors to capitalise on this imbalance by creating homes that people need and want to live in by upgrading and repositioning existing stock or by developing new blocks.

Urban boom

Demand for housing is driven by a number of factors. One is urbanisation – some 75% of EU residents now live in urban areas, up from 59% 60 years ago (see Fig. 1). Another is a growing number of people living alone. The number of single person households in the EU increased by 21 per cent over the past decade to 73 million, in part because people are getting married later and getting divorced more.¹

This has a number of investment implications. To begin with, it is important to identify markets where the demand/supply imbalance is particularly attractive, and where investments can be made at a good price.

One such location, for example is the Danish capital Copenhagen. Denmark’s vibrant economy is growing faster than any of its Nordic peers. Wages are high, and housing in the capital city is in short supply. As a result, prices for built-to-sell (BTS) – apartments designed for private ownership – have doubled over the past decade to above DKK50,000 per square metre, and average rents have also increased steadily.²

At the same time, with high borrowing costs, there has been limited appetite for large multifamily blocks. Yields on such residential assets are averaging around 4% in the centre, and slightly higher in the outskirts of the city – levels which we believe present a very attractive entry point given the expected downward trajectory in interest rates and their current premium to the sub-3% low in the previous cycle.

Taking advantage of these dynamics, managers of Pictet’s Elevation II real estate strategy have acquired a recently developed estate of some 534 apartments in the western suburb of Rødovre, which we plan to modernise and split up into a mixture of BTS properties and smaller assets that are more easily accessible to institutional investors. Only a 12-minute train ride away from the centre, the area is known for its green spaces, sports facilities and a large shopping centre. The buildings themselves, however, despite being newly constructed and benefitting from an attractive modern design have been somewhat neglected, and our goal is to make them more appealing, with a rooftop garden, an overall improved look and feel and regular events such as a monthly flea market.

Such repositioning is part of the value-add approach to real estate – investing in properties that require management and/or structural improvements. Sometimes we also see scope to develop new real estate. One such recent opportunity was in the Swedish capital Stockholm, a city where residential market dynamics are similar to Copenhagen.

Its population is growing at around 2% a year, but housing supply is not keeping pace, in part due to expensive building materials and the high cost of capital. These costs are now starting to stabilise and, with interest rates expected to fall, we see positive prospects for long-term investor interest.

What is more, declining transaction volumes and lower land prices mean that high quality land that was previously too expensive, can now be accessed at attractive prices. Our local network enabled us to source a joint venture buy-to-rent (BTR) deal with a Swedish developer – who already owns the land – in the north-western suburb of Jakobsberg, 20 minutes’ train from center and set to benefit from a metro extension by 2028. Here we are developing 223 modern apartments, located right next to pre-school which is being developed simultaneously. In this case, we were able to take advantage of the current stagnation in development to structure the deal to limit risk – including a 20% investment commitment from the developer and a preferred return clause.

A touch of luxury

Both the Swedish and the Danish assets are set to offer high quality but relatively mass-market residences. We also see opportunities at the other end of the scale, in luxury serviced accommodation for sale in cities which are popular with the international wealth set. This product doesn’t really exist yet in Europe, compared to other parts of the world, and we have the opportunity to really listen to what our clients want when developing.

Popular cities include the Spanish capital Madrid (very much in favour with Latin American immigrants), Paris, Milan and London. In Madrid, we recently partnered with the hotel chain Mandarin Oriental to deliver high-end services for our development, such as a concierge (who can arrange for your apartment to be pre-stocked with your favourite food for your arrival, book your theatre tickets and restaurant tables), a luxury gym and a spa.

By developing the right assets in the right location – tailored to a specific demographic – all of the units were sold or reserved by end-September 2024 at pricing significantly ahead of business plan assumptions.

Sustainability and local knowledge

In all our projects, sustainability is a key consideration, and we aim to achieve top environmental ratings for all buildings. In Copenhagen – a city which hopes to become the world’s first net zero capital – we are planning to install solar panels for on-site energy generation. Our other residential projects feature energy-efficient elevators, LED lighting, mobile apps through which residents can track hot water and heating consumption.

The other common factor across all projects is the need for local knowledge, an important factor in all real estate investments but particularly in residential due to a plethora of often confusing regulations. Each country has its own rules about housing and development. Many, including Sweden and Germany, also have complicated rent controls. Investors need granular knowledge of all of them to avoid possible pitfalls and to maximise investment outcome.

In Sweden, for example, one reason why we opted for a new development over an existing block was that existing properties are subject to stringent rent controls, while rents for new stock are typically allowed to be set at market rates at completion.

In Denmark, meanwhile, we were able to take advantage of a special bond-backed mortgage system to finance the deal at a very attractive all-in cost, thus generating an attractive income return already from day one.

By leveraging our local knowledge, as well as our experience in repositioning and developing assets, we are thus able to take advantage of the window of opportunity in European residential – helping address the shortage of quality liveable accommodation while delivering attractive returns for our investors.