European alternatives: Will single-family housing eclipse multi-family in the European rental market?

Inevitably, living will become a more globally institutionalized sector, as investors seek security of income, yield stability and rental appreciation, and aided by an investor audience greater aligned than ever before with tomorrow’s world needs. Industry analysts are already predicting that the living sector could account for over one-third of all direct real estate investment globally by 2030, with its share of capital flows globally having increased from 14% in 2010 to 25% in 2020.*

One segment where we expect to see significant change is single-family housing (SFH) rentals. But is this likely to evolve into an asset class suitable for institutional investors?

Single-family vs. multi-family

A single-family home is a property built (or existing) for the rental market to service families or individuals looking for additional space or specific home needs. It is a form of build-to-rent (BtR) that focuses on 30 to 45 year olds with young families. It is tailored more to the needs of this customer base, unlike most BtR multi-family housing (MFH) flats that appeal to singles and young professional couples.

Knowing the consumer

The BtR multi-family housing segment generally has a higher proportion of GenZ and millennials than the single-family housing segment, although this varies among different European countries. Comparing each segment’s typical tenant, we expect the typical SFH tenant to:

• Be older, and more likely to have a family
• Have a greater desire for local community, infrastructure, schooling and facilities
• Have more established friendships, interest groups and permanent employment
• Desire sustainability, connectivity, flexible and additional space, and garden access
• Desire fewer operational management initiatives
• Prone to longer lease terms and ability to personalize the house

The rationale for SFH

Three factors dominate the investment case:

• Defensive investment characteristics and solid projected returns
• Favorable socio-demographic trends, across selective markets
• Favorable demand and supply dynamics

Can institutional investors satisfy SFH demand?

Knowing which markets have a deep and established rental market, coupled with a preference to live in housing rather than flats, is vital in terms of determining the scalability of the SFH concept. Liquidity, future demand, occupancy and performance potential are also factors. In our analysis of the demographics across Europe, the age cohort 30-49, which is expected to represent the bulk of the SFH consumer base, shows material variance across the region. We can identify two specific categories within that cohort:

• First flight – in their 20s and early 30s, leaving home or further/higher education, getting a job, finding a partner
• Nesters – in their 30s and 40s, in a stable partnership, probably with children, looking for a larger living space, high consumption pattern

Such is the maturing nature of European demographics, few markets can boast a growing SFH age cohort. When comparing the last decade with the next, the Nordics, the U.K. and Poland are the exceptions.

The number of households in the 30 to 49 age cohort declines in Germany, France, Italy and Iberia. These large economies, however, host a very large existing demand pool, which modern SFH could satisfy especially given the increasing affordability issues regarding house purchases. Within these countries, there are cities that are expanding in this demand bracket.

Our research findings show growing demand in Stockholm, Copenhagen, Amsterdam, Helsinki and other core European cities from the first flight and nesters age cohorts. Furthermore, this is in conurbations with established, institutionalized housing markets.

The investment case for SFH is based on two strong elements that should appeal to capital looking for defensive yield. They are the prospect of higher yields/income components and the perceived greater counter-cyclical qualities given evidence of less turnover in SFH than MFH. The current spread that exists (estimates to be approximately 25 to 75bps, which in part reflects the suburban nature of SFH and lower efficiencies) could be temporary as the sector matures, especially given that historically SFH is also associated with lower maintenance costs. Evidence from the U.S., where operating expenditure is c.10-15% in SFH, indicates these costs are roughly half of that associated in MFH, although this could range if additional amenities and services are offered.

Outlook

Changing consumer preferences and working habits post pandemic have spurred interest in SFH. While still a nascent sector in the U.K. and the rest of Europe, the success of the concept in the U.S. implies it could quickly evolve into an institutional asset class. In some markets, like the U.K., Nordics and even the Netherlands and France, where houses and not flats are the dominant residential asset type, SFH could overshadow BtR MFH in terms of future institutional volume and assets under management.