Europe's residential bull market stalls, but deals returning - research

The decade-long bull run in European residential investment markets, driven by ultra-low interest rates, is coming under strong pressure from ECB rate hikes, according to new research from Catella Residential Investment Management (CRIM), a subsidiary of the Stockholm-based Catella Group.

Yet while valuations have been stagnating due to the wide gap in expectations between most buyers and sellers, there are now signs of bigger deals being done and a new lower consensus price floor may emerge in coming months, the research suggests.

The Catella residential markets overview analyses European residential market trends across 63 cities in 20 countries, and reveals that the average residential rent across all years of construction in the 63 European cities surveyed is currently €17.25/m2 per month, 2.5% higher than in Q3 2022.

The lowest rents are found in Liège in Belgium with 9.50 €/m2, followed by Brno in the Czech Republic with an average of 10.00 €/m2.

London has the highest rents with an average of 33.10 €/m2, followed by Geneva in Switzerland, which ranks second with 31.00 €/m2. Luxembourg follows in third place with 30.00 €/m2.

Thomas Beyerle, head of research Catella Group, said: 'After months of stagnation due to the rapid rise in interest rates, the first sizeable transactions in residential investment markets are just starting to occur again primarily due to strong pent-up in housing demand in European cities being met by very limited supply.

'But we still expect it will be several more months before a general market consensus emerges at lower levels of valuations which investors can congregate around, allowing transaction volumes and liquidity to recover.

'The surge in bond yields, which is offering investors solid returns and a lower risk fixed income alternative to real estate will, however, be also likely to contribute to putting a cap on residential valuations.'

The research also finds that the average purchase price for a condominium in Europe (all construction years) in Q1 2023 is 5,235 €/m2. The range is from 1,720 €/m2 in Lahti to 15,250 €/m2 in Geneva.

Meanwhile, the average European prime yield for apartment buildings is 3.97%, an increase of 37 basis points compared with Q3 2022.

The lowest yield of all European residential markets is found in Stockholm at 1.75% (+40 basis points to Q3 2022), followed by Zurich at 2.00% (+60 basis points to Q3 2022).

The report concludes that the most attractive prime yields can be found in the Baltic cities of Vilnius at 5.50% (+10 basis points to Q3 2022) and Riga at 5.40% (+5 basis points to Q3 2022), as well as in the Polish cities of Krakow at 5.40% (+15 basis points to Q3 2022) and Wroclaw also at 5.40% (+15 basis points to Q3 2022).

Dr. Lars Vandrei, senior research manager at CRIM, added: 'The fundamental conditions in the European residential property markets remain intact. However, the more difficult financing conditions are leading to a sharp decline in new building permits and thus the supply of apartments will fall noticeably in coming months.

'At the same time, demand remains at a high level, driving up rents and occupancy rates. The social aspects of rental affordability will thus continue to come to the fore in the media and in political arenas around Europe. We expect that yields could stabilise in the second half of the year.'

Based on current market prices for apartments for rent and an assumed expenditure of 25% of local disposable household income on ‘cold rent’ (not including costs such as utilities and services charges), households in Graz can afford the largest flats.

Due to comparatively low incomes, affordable housing in Polish cities is mathematically the smallest.

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