Residential investment: cash cows or question marks?

Published date03 September 2018
Date03 September 2018
AuthorLaura Gabrielli
Guest editorial
Residential investment: cash cows or question marks?
Residential property is a unique real estate investment, as it represents the largest asset
class in most European countries fluctuating between the 3 and 8 per cent of the gross
domestic product (GDP). Many research papers have shown that residential investment is a
leading indicator of GDP, while the non-residential investment is not. Housing investment,
despite being a small share of total output, plays a huge role in the business cycle, as
housing (and its prices) is an indicator of recessions and booms in the market.
Houses are the most important assets in householdsportfolio: more than half European
population lives in owner-occupied housesor apartments, with a peak of ownership recorded
in Romania (around 96 per cent of the population) and the lower percentage in Germany
(around 52 per cent).Only in Switzerland, the share of tenants is higher(56 per cent) than the
share of people who lives in owner-occupied dwellings. Residential property is intrinsically
linked with wealth.
Although residential rented sector has significant numbers, as shown before, and huge
potential, ownership still dominates the market, and rents are generally not sufficiently
attractive for large investors, who are looking for a constant income flow rather than a
return in capital growth. Therefore, the lack of well-structured investment vehicles in the
housing sector is a structural weakness of the European market. Market analysis regarding
institutional and large investors shows that the residential plays a marginal role in their
portfolios, and the option to invest in mainstream residential remains narrow. In some
countries, special residential investment vehicles have been introduced, but only small-scale
players prevail in the market, and the number of assets managed by institutional investors
is still low.
Low-income flow and high operating costs are a barrier for the market. The housing
market shows much higher tenant turnover and more intensive property management both
in term of efforts and costs. In fact, the management of a fractional real estate asset like the
residential, with its particularities, characteristics, and complexities, requires a constant and
continuous technical approach that not all companies are willing to face. Tax issues are, in
some countries, another barrier, which are difficult to overcome.
What are the benefits of investing in the residential sector?
Given the issues above, should we leave this market segment behind and forget about it?
The residential sector still represents a significant investment opportunity in emerging
countries or cities with leading and robust economies, because of demographic growth and
the increase of middleclass wealth. The residential investment has favourable income
matching and guarantees higher stability in comparison to other forms of investment.
Residential property provides a good return, privileging long-term holding rather than a
trading option. In the long market cycle, rents tend to oscillate less than house prices,
showing that rental income yields generally have low volatility and potential growth of
expected future rent streams. The residential investments are inflation hedging properties
for institutional investors.
Furthermore, residential properties are sometimes easier to refurbish or to readapt to
new uses. Residential buildings do not become obsolete as quickly as commercial buildings,
in which technologies play an essential role and might change entirely over time, and they
can be expensive to replace. Even if the housing sector has a higher customer service
Journal of Property Investment &
Vol. 36 No. 6, 2018
pp. 510-512
© Emerald PublishingLimited
DOI 10.1108/JPIF-09-2018-097

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