Europe’s housing crisis: call for institutional capital

 Across Europe, access to decent quality housing that offers security of tenure at the right price is becoming harder and harder for many people. Both central government policy and local planning pragmatism are key to establishing the foundations of a more stable environment. There’s also a significant opportunity for real estate investors to make a meaningful contribution. Housing middle income Europe is the most recent in a series of deep-dive research papers published by INREV, examining the residential market. Here, IQ picks out some of the key takeaways from the paper.

High demand and low supply 

It’s no surprise that the majority of existing housing stock in the private rented sector (PRS) is unfit for purpose. In most European markets, PRS has been a narrow segment provided by small private investors or individual landlords that mainly cater for the needs of a younger or economically mobile population.  

But the huge spread of urbanisation has seen populations swell, and demand for quality accommodation continues to significantly outstrip supply. Ongoing house price inflation has made owner-occupation more expensive and more difficult. It’s pushed more people into private rented options, even though nearly a quarter of renters are more overburdened with housing costs than those who own their own homes.  

Increasing numbers of people are delaying marriage and children, and more are divorcing, changing the shape of housing requirement with a growing need for smaller, centrally-located and co-living solutions.  There’s also a need to improve the quality of existing stock – much of which was built before 1980. Particularly in the face of climate change, new energy efficiency standards have added urgency to this requirement. 

PRS presents a clear opportunity for investors  

European policymakers are already focused on solving the housing crisis, but they’ll need the cooperation of other willing participants. Specifically, there’s a requirement for a combination of global capital, expertise, and experience of best practice across jurisdictions.   

There is, therefore, an obvious opportunity for institutional capital to play a key role and for investors to invest sustainably, with a symmetry of purpose. Investors who deliver professionally managed, purpose-built assets can expand the private rented sector and transform the availability of suitable, quality housing. In part, this will loosen the burden on public capital to provide social and cost-rental housing support for middle income households, freeing it up for other purposes.  At the same time, investors will be able to unlock long income streams that are dislocated from the economic cycle.  

Understanding the risks is key 

Investing in the PRS requires that investors fully understand structural changes both within the sector and across the wider housing market. Two examples stand out: 

Firstly, the wide variations in scale, quality, and regulation of the different types of tenure across European markets, can impact the capacity for institutional investors to participate in residential strategies. So too, can the different rental regulations. In Europe, rent control policies that cap price increases without corresponding policies in place to encourage new supply, exacerbate housing shortages. Nonetheless, the critical need to expand the supply of affordable housing is high on most policymakers’ agendas. In some markets, such as France, Ireland and the UK, housing policy has been tailored to enable greater participation of institutional investors in the affordable housing segment. 

Similarly, access to suitable land for development requires careful consideration. There are often timing risks associated with wider financial market movements and regulatory changes – especially uncertainty around the direction of travel for future rental regulation. This can deliver a knock-on impact on the price and availability of appropriate sites for development, especially where landowners hold on to land, awaiting price recovery. 

Collaboration is a critical success factor 

As housing markets develop and change, governments and institutional investors will need to work more closely together to ensure the right frameworks are in place for the successful evolution of a more balanced housing market.  

Policy interventions, for example, will be an important part of this equation. Initiatives, such as finance and funding arrangements, tax breaks, planning considerations and land availability, will help to ensure that institutional capital can contribute to the much-needed expansion of housing supply across European markets.  

Download the first paper in the series here.