Europe’s residential property market to fare better than fixed income: Patrizia

Europe’s residential property market will likely continue to fare better than fixed-income assets on the prospect of interest rates remaining low far longer than expected, said a senior official of German real estate investment firm Patrizia AG.

Residential property investment, with a higher yield spread, has become an attractive substitute for negative- to zero-yielding fixed income. Further, Europe's housing market has been outperforming the US market, said Mahdi Mokrane, Patrizia's head of investment strategy and research.



“The European residential market went into the COVID-19 crisis as a solid performer and will emerge even stronger on the other side,"he told the Korean Investors in a recent email interview.

He noted that  European residential assets are more than an adequate proxy for the fixed-income needs of institutional investors, and thus should be included in a diversified core real estate portfolio.

“A diversified residential portfolio offers a 250-300 basis point premium compared to an average 10-year bond yield," he added.

Looking as far back as the 1990s, the net operating income generated by a square meter of residential space in Europe has remained remarkably stable compared to office, retail and even logistics facilities.

Patrizia focuses on housing for middle-income tenants in European cities. Rent collection across its residential portfolios between February and May this year topped 97% of the rent due, with a drop in tenant turnover due to lockdown measures.

Compared to the US real estate market, investment in Europe’s residential property market has proved more resilient in terms of rent collection over the past decades, including when the dot.com bubble burst in the early 2000s.

The COVID-19 impact on the job market and the rental housing market was milder in Europe than the US, given that rent collection in Europe is 10-15% above US levels, said Mokrane.



Patrizia manages over 45 billion euros ($54 billion) in assets, of which residential assets account for 11.4 billion euros.

It launched its flagship Living Cities Residential Fund in November last year, targeting to raise 1 billion euros for the vehicle. The fund has received $50 million in commitment from Korea Post and $30 million from the Korea Scientists and Engineers Mutual-aid Association (SEMA) last year.

Residential properties remain a small portion of institutional investors’ portfolios but they are becoming an attractive asset class for income seekers, Anne Kavanagh, Patrizia CIO, told the Korean Investors last December.

FORWARD FUNDING

Looking forward, development finance, or forward funding for residential buildings, may provide a good opportunity for institutional investors, as the existing lenders, mostly banks, may divest of the construction projects on fears of the coronavirus impact's on the job market.

“We expect opportunities to emerge in the forward funding space … Now finance will be scarcer and existing lenders may be looking to de-risk,” said Mokrane.

Living Cities Residential Fund focuses on core assets, but may have exposure to development finance to shore up returns.

“Developers may seek institutional capital partners to sell part or all of their projects. We see this as a phase for our funds to team up with developers and manufacture core products in the locations that we favor.”

Ongoing urbanization and the aging population will continue to increase demand for affordable homes and retirement housing in cities. A growing middle class and higher demand for college education will boost demand for affordable student housing, as well.

Regarding student housing and co-living accommodation, which have been more affected by the COVID-19 than other real estate asset types, Mokrane said Patrizia will remain cautious in the near term. But it may begin to raise exposure to those assets in the next 12 months.

For now, only about a quarter of the housing market in Europe is suitable for institutional investors. The regulation and market dynamics are extremely local, compared to the US, which points to the need of local partners to invest in Europe's residential property sector, he said.

Write to Seonpyo Hong at rickey@hankyung.com