The second quarter saw a bounce back for European multifamily, pushing overall Living to be the largest sector in Europe. While investment rose 16% from Q1, the number of transactions rose by just 2%, with a handful of large deals driving growth, according to JLL “EMEA Multifamily, Market Overview, Q2 2023”.
Investment in European multifamily rose 16% quarter-on-quarter to some €8 billion in Q2. This is in part down to a number of large deals in Germany; during the period the number of transactions rose by just 2%. Yet, activity remains below historic trends, the quarter was 32% the level of last year and so far 2023 is 47% below the same period in 2022.
Not all markets have responded the same way: the UK has risen 12% year-on-year, boosted by a rise in single family rental transactions, while Germany remains the largest market following a number of large REIT sales. However, all countries are grappling with high construction costs. Across Europe, JLL’s construction inflation index shows growth slowing in 2023, on average up 6% in Q2.
The effect of prolonged high costs is visible in reduced building, with permits having fallen 7% year-on-year. Heightened demand, boosted by immigration and high mortgage costs, is driving above-average rental growth of 10% in Europe, within double digit rises common, despite regulation in many markets. Affordability concerns highlight the value of quality, energy efficient buildings.
The increased demand is leading to a boom in investment and in the residential real estate market in Greece, which, according to the recent analysis of Alpha Bank, will be maintained in the future. During this year's first half, residential investments increased by an impressive 46.8% compared to last year, when the corresponding increase had not exceeded 16.4%. In addition, the construction output index increased by 16.8% year-on-year (from 22.8% in the first half of last year). As highlighted in the relevant analysis, the recovery of the real estate market, which began in 2018, coincides with the increase in both real estate investments and building permits. However, it is dramatically different (reduced by more than 60%) from the construction activity in the pre-crisis years
Based on ELSTAT data, during the first half of this year private construction activity increased by 11.6% based on the number of building permits, by 15% based on surface area and by 15.9% based on volume compared to last year. However, it remains at significantly lower levels compared to the "golden years" as by June 2023, 12,991 building permits had been issued, while in the corresponding period of 2007, 40,840 had been issued.
Empty office spaces are being repurposed into residences
At the same time, construction challenges and an undersupply of housing have prompted many developers to convert outdated and vacant office space into housing. According to estimates by JLL Research, vacant office space in the 35 largest European cities could provide a total of around 500,000 homes.
Notably, in Frankfurt, approximately 44% of new homes delivered in 2023 are office conversions, while multifamily has accounted for 52% of US office space conversions over the past two years, with grants and tax incentives helping to this direction.
Rising rental prices put substantial pressure on household finances. As indicated by JLL, in 22 European cities, the average rent as a percentage of income has increased marginally in recent years, and now corresponds to 30% of income (end of 2022).
This level is considered marginal for acceptable costs, leading many governments to seek to regulate rental prices. In May, Spain approved a "Right to Housing" bill, which limits rent increases in on-site rentals to 3% until the end of 2024, while a rent index will be set to limit increases from 2025 and afterward.
The general situation has led some politicians to question the ESG criteria. Notably, the long-awaited EPC C energy efficiency restrictions policy on private rentals in the UK is expected to be delayed, according to reports.
Ultimately, in the effort to achieve the goals of reducing carbon dioxide emissions, which seems to monopolize the interest of many companies and governments, the balance between environmental costs, affordability and social impact should not be overlooked. In this effort, ensuring affordable housing must remain the focus.
