Home Insights Real estate The Decisive Eye

The Decisive Eye

European Residential: Unlocking the housing potential

October 10, 2024 | 13 min read
Daniel Tomaselli
Manager, Global Research
Download PDF
linkedin icon link icon

Introduction

Over the last decade, the European residential market has undergone a profound transformation. Housing demand has consistently outstripped supply in most geographies, resulting in widespread affordability and availability problems. Thus, homeownership has become increasingly difficult to obtain for a growing number of households and young adults who are now forced to live with their parents or rent for longer compared with previous generations. This backdrop poses steep challenges for the industry but also creates a unique set of investment opportunities.

We believe that investors should pay keen attention to:

  • Positive fundamentals from long-term structural drivers;
  • Resilient income and cash flow, with weaker correlation to the broader economic cycle; and
  • Strong values enhancing environmental, social, and governance (ESG) portfolio credentials.

Sweet home turned sour

For decades, long-term renting through necessity was uncommon among European households, with limited exceptions. Rising disposable income, favourable social policies, looser planning regulations, and sprawling development projects enabled families to enter the for-purchase market following a short tenure as renters. In England, for example, the percentage of owner-occupied homes rose significantly during the second half of the 20th century, from just over 40% to nearly 70%. Housing became the cornerstone of household wealth, and owning a home was considered a crucial part of achieving financial security. Conversely, renting was viewed as a transient condition, something people had to temporarily endure before they could afford to buy their own home. However, when millennials reached adulthood, they faced a far different economic landscape. For those born after 1980, the path to homeownership has become far more challenging than it was for previous generations. Across Europe, from the large inland metropolitan areas to coastal cities, a significant housing affordability and availability crisis is taking place.

EXHIBIT 1: Affordability worsened for the newer generation of first-time buyers
House price to income ratio for selected European residential markets

1990
2000
2010
2020
2023
Home price to income ratio increasing from 1990 to 2023 in countries such as Belgium, Norway, the UK, and others.

Source: OECD, September 2024

This shift is perhaps most pronounced in Ireland, where the share of owner-occupiers declined sharply, by more than twelve percentage points, from 82% in 2004 to 69% today, according to Ireland’s national statistical institute, CSO. At the same time, the average age at which Irish people became homeowners doubled from 22 to 44 years old. These developments reflect the significant challenges facing younger generations and less affluent families, who must now navigate a housing market that is insufficient to accommodate households today, due to a widening supply-demand deficit. The roots of the problem date back to the mid- 1990s but worsened in the period following the global financial crisis (GFC) of 2008. Since then, Ireland has accumulated a housing deficit of approximately 235,000 homes, equivalent to 11% of the national housing stock, according to a study by Ireland’s Housing Commission. In the best-case scenario, closing this gap is expected to take at least ten years.

EXHIBIT 2: Home price and rent have defied gravity
Ireland’s residential price and rent indexes

Residential Rent Index
Residential Price Index
Consumer Price Index
Ireland's residential rent and price index increasing against the flat consumer price index over same 12 years.

Source: Daft.ie, June 2024

Conclusion

The housing affordability pressure and availability shortfall pose several challenges for decision-makers and households. However, it can also open opportunities for investors with a decisive eye. While long-standing structural and market factors have limited the supply of homes and made ownership increasingly difficult for younger and less affluent households, institutional capital has the potential to play a crucial role in addressing these problems while also reaping the fruits of their contribution. The European residential sector is still relatively young and fragmented. The availability of standing stock with institutional grade may be limited, too. However, it is an asset class that benefits from relatively stable returns, portfolio diversification, and enhanced ESG credentials. With markets beginning to recover, a favourable entry point is emerging. It may be the right time for investors to bring this opportunity home.

Over the last few decades, the European residential market has undergone a remarkable transformation and is still evolving. Download the latest edition for our full perspective.

Footnote

  1. Index, 2015 = 100

    ↩︎

  2. Index, 2012 = 100

    ↩︎
Real estate
Disclosure

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Risk Considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Asset allocation and diversification do not ensure a profit or protect against a loss.

Important Information
This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account.

Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided. All figures shown in this document are in U.S. dollars unless otherwise noted.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

Integration of sustainability considerations and/or environmental, social and governance (ESG) factors is qualitative and subjective by nature. There is no guarantee that the criteria used, or judgment exercised, will reflect the beliefs or values of any particular investor. There is no assurance that any strategy or integration of sustainability considerations and/or ESG factors will be successful or profitable.

This material is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

This document is issued in:

  • The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.
  • Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland. Clients that do not directly contract with Principal Global Investors (Europe) Limited (“PGIE”) or Principal Global Investors (Ireland) Limited (“PGII”) will not benefit from the protections offered by the rules and regulations of the Financial Conduct Authority or the Central Bank of Ireland, including those enacted under MiFID II. Further, where clients do contract with PGIE or PGII, PGIE or PGII may delegate management authority to affiliates that are not authorised and regulated within Europe and in any such case, the client may not benefit from all protections offered by the rules and regulations of the Financial Conduct Authority, or the Central Bank of Ireland. In Europe, this document is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID).
  • United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorized and regulated by the Financial Conduct Authority (“FCA”).
  • This document is marketing material and is issued in Switzerland by Principal Global Investors (Switzerland) GmbH.
  • United Arab Emirates by Principal Global Investors LLC, a branch registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as a representative office and is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organisation.
  • Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No. 199603735H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act 2001. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
  • Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068, AFS Licence No. 225385), which is regulated by the Australian Securities and Investments Commission and is only directed at wholesale clients as defined under Corporations Act 2001.
  • Hong Kong SAR (China) by Principal Asset Management Company (Asia) Limited, which is regulated by the Securities and Futures Commission. This document has not been reviewed by the Securities and Futures Commission.
  • Other APAC Countries/Jurisdictions, this material is issued for institutional investors only (or professional/ sophisticated/qualified investors, as such term may apply in local jurisdictions) and is delivered on an individual basis to the recipient and should not be passed on, used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Principal Global Investors, LLC (PGI) is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA), a commodity pool operator (CPO) and is a member of the National Futures Association (NFA). PGI advises qualified eligible persons (QEPs) under CFTC Regulation 4.7.

Principal Funds are distributed by Principal Funds Distributor, Inc.

© 2024 Principal Financial Services, Inc. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset Management℠ is a trade name of Principal Global Investors, LLC. Principal Real Estate is a trade name of Principal Real Estate Investors, LLC, an affiliate of Principal Global Investors.

MM14157 | 09/2024 | 3865160 -122025
About the author