Last year, we wrote an article about the trends to expect for PropTech and the built environment. This year, we enlarge our scope, and take a look at residential and commercial real estate, PropTech and ESG trends in four separate articles in this 2023 Under Spotlight series!
This article from the series will summarize everything we have learned about residential real estate from market reports, industry events, podcasts, webinars in 2022, and bring projections for the 2023 market:
- Investors are planning to dedicate up to €151bn to European rented residential assets – especially build to rent and student housing over the next five years, while the pressing shortage in all rented residential assets are straining renters globally, causing urgency for developers as well as governments and local authorities.
- Location remains to be a significant factor for new generation tenants' living experience, while the emphasis on professionally managed spaces and tenant satisfaction is increasing steadily.
- The social element in ESG is getting more attention with the slowdown of the pandemic and rebirth of social life in buildings.
Build to Rent: Shortage in Supply, Abundance in Demand – Promising Opportunities for Investors
In the UK, the build to rent market is gathering more pace inside and outside of London with promising investment opportunities than any other country in Europe. The number of completed BTR units has tripled over the last five years due to the market needs; as well as the full year investment to BTR in 2022 has reached up to £3.8bn, 31% higher than the 2016–2020 long-term average according to Knight Frank's 2022/2023 Multi Housing Report.
From UKAA's BTR Conference in November 2022, we learned that while UK's investors have been influenced by the macroeconomic slowdown, they are still attracted to the rental sector. This is due to the resilience of the rental market in times of economic uncertainty – shortage of supply in rental homes and consequently scaling rents (up to 21% over the last decade), and growing tenant demand.
Projections for 2023 underline that the rental growth will persist, reaching slightly under 50% of the spending of the pre-tax income of an average tenant.
Similar trends can be observed in the DACH region and the Nordics due to the increasingly individualistic lifestyle of the new generation. Nordic capital cities host Europe's highest percentages of one-person households. Combined with the land supply shortages and few new developments, this results in the imbalance of housing supply and demand; and finally in high-rising rental growth.
“Rising costs will not detract from the desirability of residential investments in the long run. The underlying fundamentals of the residential market are strong and will remain strong,” said Mark Kuijpers from Greystar at the European Residential Investments panel at EXPO Real 2022.
PBSA: Shortage in Supply, Even Greater Abundance in Demand – Promising Opportunities for Investors
The housing supply shortage does not only apply to build to rent, but to other asset types such as purpose-built student accommodation. Research reveals that there are currently 3.1 students for every student bed available, standing for a current shortfall of almost 1.5M student beds to meet the demand across the PBSA sector.
This urges investors to increase the volume of money into PBSA; which has resulted in EUR11.7 bn increase in PBSA in 2022, 130% increase from 2021. Still, this does not mean that the huge undersupply can be addressed immediately.
By 2025, the UK will face a shortfall of around 450,000 student beds, according to the latest data from StuRents. Central and Eastern Europe is experiencing much steeper rent increases than Western Europe, with rate increases reaching an average of 17.4%, dwarfing the 3.1% rise seen in Western Europe. In Poland, Germany, France, the Czech Republic and the Baltics, where the competition in PBSA landscape is lower, the occupancy rate goes up to 98% and rents are rising the fastest.
What's up and coming in the PBSA market with brand new assets and even further opportunities is Spain and Italy, where the student population has been growing immensely in the last couple of years, maintaining 80% occupancy in most cities, as well as Ireland as it welcomed 139% more European students after Brexit.
The New Generation of Real Estate: Emphasis on Location Is Still Important, while Professionally Managed Spaces, and the Social Element Gain Traction
Build to sell is losing traction in the young generation in the last couple of years due to inflation and increasingly harder-to-get mortgages; and this has caused renting to turn into a necessity rather than a lifestyle choice. The current BTR, co-living and student housing market mainly targets the 18-35 age bracket, with a focus on flexibility, easy access to urban spots and social life, and professional maintenance. For example, in a tenant demands and needs survey we conducted in November 2022, more than ¾ of tenants found location to be an important factor for their living experience; while they also highly value seamless maintenance perks such as parcel services or online issue reporting.
UKAA's webinar on things every top BTR operator should be doing for residents, we learn that buildings with high customer service scores have the strongest correlation to professional management – including high-level communication with tenants, elevated convenience of living with the help of technology, community activities, a dedicated facility team taking care of issues, amenities and spaces for activities, sustainability practices, concierge and storage services as well as a strong focus on tenant wellness, safety and security.
These characteristics of a living space appear in recently-built, modern spaces; where we can see a stronger emphasis on ESG and all of its letters. For many businesses, the social metric is still hard to measure compared to the environmental and governmental metrics; at the same time, “...it is central to the new-generation-of-real-estate feeling. You cannot spend long hours on administrative and maintenance-related tasks if you want to create thriving communities. Not all of the community members will be fully active, but don't be discouraged by that, and measure the success of your activities by the impact of people's engagement, not by the number of participants,” says Gosia Czwarno at our Community 101 webinar.
In our estimation, these trends will shape much of the residential real estate dialogs in 2023. The real estate market is definitely going through a transformation with technology and ESG, as well as challenges coming from rising construction costs and high inflation globally. We'll regularly update our audience on these trends as they come, since the market is subject to change at all times!