Operational residential investment (which comprises multifamily, student housing and senior living assets) accounted for 27% of global real estate investment in the first three quarters of 2020, up from just 16% a decade ago, according to Savills Global Living Report 2020.
The research also shows that capital targeted at the sector from funds has risen by 60% in the last four years, from $16.4bn in 2016 to $26.3bn in 2020 (Preqin).
The sector’s resilience and strong fundamentals hold true in today’s challenging macro environment, with demographic trends and affordability constraints continuing to drive demand for rental accommodation. As such, investment volumes in the first three quarters of this year were down 31%; the least dramatic fall alongside logistics (-16%) compared to offices (-37%) and retail (-38%) when benchmarked with the same period in 2019.
The figures come after a record year in 2019 when a total of $297bn was invested into the sector.
Even with wider global uncertainty as a result of COVID-19, the operational residential sector has held up better than some others this year. Investment activity has largely been driven by the consolidation of companies across sub-sectors including multifamily and student housing.
Despite the near-term effects of the pandemic from a macro-economic point-of-view, the longer-term growth in capital volumes targeting operational residential assets speaks for itself. Investors are not only seeking to diversify their real estate portfolios but are looking for those stable income-streams for which the sector has become so renowned.
The report shows that cross border investment into the operational residential sector has also grown, now standing at $46bn (Q4 2019-Q3 2020) and accounting for 22% of total investment into residential. This is up from the 14% that cross-border deals accounted for just four years ago in 2016.
Subsector analysis
By far the largest of the global residential sub-sectors, 2019 was the most successful year to-date for multifamily assets with $223bn traded. Of this total, 71% was in the US, the largest and most mature market, followed by Western Europe at 24%. As the sector develops outside of the US, the Western European (including the UK) share increased to 27% in the first three quarters of 2020. Germany was once again the largest market in Western Europe, with €15.6bn of transactions in the first three quarters of 2020 according to Savills data.
The multifamily market is relatively nascent in Australia, however Savills data shows that nationally the sector in Australia is on track to deliver 10,000+ multifamily apartments by 2023, with the completion of 45,000 apartments projected by end of 2028 – on par with the trajectory of completions that the UK market witnessed. It is expected that as Federal and State Governments adapt rules pertaining to tax and planning to make investment into the sector more attractive, investment volumes will begin to match Western European countries by 2025.
Student housing also proved its resilience despite the headwinds brought about by COVID-19 and, as a result, the effects of disrupted school and University terms. Like multifamily globally, consolidation has been a key driver in the student housing sector in Australia, which has recorded record investment volumes for 2020, which are forecast to total $3.1bn, an increase of 115% on 2019 levels. Scape has been the most active investor acquiring the Urbanest portfolio for over $2bn in the biggest deal of the year.
2020 has seen some truly impressive transactions in the operational residential sector, cementing it as one of the most favourable asset classes. With the long-term picture showing an uptick in global mobility, we expect significant opportunities to remain for investors wishing to diversify their real estate portfolios.
While there is no shortage of capital targeting the sector, the challenge (and opportunity) in Australia, at least, is finding prime development sites, completed assets or conversion prospects in which to invest.
What next?
With yield compression increasing as the maturity of the sector becomes more apparent, multifamily yields are now stabilising in most markets following a significant inward yield shift trend over the past five years.
In terms of lending, while there has been an easing in the credit markets, overall, the lending market is in a much stronger place compared to the global financial crisis (GFC). Lessons learnt from the GFC, such as rapid intervention by central banks, have supported liquidity. While banks are now more cautious, non-bank lenders (which are now more prevalent) are willing to take on opportunities with greater risk. Ultimately, residential remains as a favourable asset class to lend against, thanks to the sector’s long-term fundamentals.
Learn more in Savills Global Living Report 2020.
.jpg)
.jpg)
.png)
.jpg)
