Europe’s residential assets seen as attractive play: Patrizia

Residential properties remain a small portion of institutional investors’ portfolios but they are becoming an attractive asset class for income-seekers, driven by stronger demand for rental housing in Europe, said a senior manager of German real estate investment firm Patrizia AG.

Expected returns from rental housing may be lower than logistics and office markets, but they offer low risk and stable income as a defensive strategy in an extended low interest era, Anne Kavanagh, Patrizia’s CIO, told the Korean Investors.

“In today’s market, it is a very interesting strategy and we’ve seen very strong returns from investing in residential assets,” she said in a recent interview.

“These sectors have just started to grow … The supply has been limited in most of the cities across Europe since the global financial crisis. There haven’t been a lot of developments. Therefore, we see strong potential in that sector.”

Rent rises in Europe have been capped for a longer period of time because of regulations, hovering at around 2% points over the 10-year government bond yield on average.

Given the housing shortage and urbanization, rents would not fall off in major cities in Europe, Kavanagh said.

New types of residential housing such as micro-living residence, sort of studios or co-living units, are becoming popular in cities like Berlin and Frankfurt.

With returns across investment assets declining, the gap between bond trading and real estate trading remains attractive, she noted.

The yield gap in the residential sector is around 200 basis points. It is compared to the 300 bp plus for the office sector and 500 bp for the logistics sector, given the low default risk of rental housing.

This month, Patrizia won a $50 million investment mandate from Korea Post to invest in the housing sector.

It also recently co-invested in a $1.3 billion logistics portfolio in Europe with Danish pension fund PFA and the Public Officials Benefit Association (POBA).

It targets residential properties in central locations with accessible infrastructure.

By Hyun-il Lee

hiuneal@hankyung.com