Regulating rents is an ‘own goal’ for European cities, as it fails to ‘solve long term housing issues’, according to Patrizia’s chief economist, Marcus Cieleback.
‘Regulation doesn’t build houses,’ he says. ‘You usually end up creating low quality, long-term housing stock, as we have seen in Eastern Germany. Essentially, it’s a way to appeal to voters today, but you’re not solving long term issues,’ Cieleback suggests.
Acknowledging the fact that the search for residential portfolios is this year’s ‘headline story’ for the real estate investment community, Cieleback says that pan-European investors are still struggling to find the information they need to make informed decisions.
‘When you look at how much interest there is in residential, there is actually much less transparency than we are used to for the other property sectors,’ Cieleback notes. ‘We’re trying to add some transparency to the market. The big question when you’re looking at residential, is the challenge to get city-level data. Our research is trying to show the rental cycle in residential, which actually does exist.'
‘Residential is quite boring - that’s its attractiveness,’ Cieleback notes. ‘Despite the existence of a cycle, rents almost never go down. On the upside, looking at the last five years, rental growth is at 2-3% on average which is nice, and crucially, is outstripping inflation. But returns are nowhere near the values you get on the commercial side, and that’s because regulation is an ever-present issue in the market.’
For Cieleback, the regulation issue and the subsequent need for diversification leads into an argument for going cross-border. ‘Residential today is really a pan-European story. Institutional investors have traditionally stuck to domestic stock, but German investors in particular are leading
the cross-border charge. US investors too are consolidating the sector, particularly in Spain,’ Cieleback says.
‘Our strategy is to focus on a quarter of the European landmass. Institutional investors do best to seek returns in areas of higher population density, making excellent local knowledge and expertise an essential ingredient for successful investment decisions,’ Cieleback concludes.