US group Greystar has raised a new fund targeting residential rental accommodation in Europe, with the total poured into a part of the property market seen as best protected against surges in inflation above 30 billion euros this year.
The shorter leases typical of residential rental housing offer landlords the option of trying to charge tenants more, which has become more attractive as inflation picks up in major Western economies.
Greystar, based in Charleston, South Carolina, this week attracted 1.55 billion euros from institutional investors for a fund that initially solicited 1 billion euros.
The strength in demand contrasts sharply with the rest of the real estate market, which has already been cooled by rising interest rates and slowing economic growth.
“Residential has historically been the best inflation hedge of all commercial real estate, due to the length of the lease,” said Mark Allnutt, Greystar’s senior managing director for Europe.
Unlike commercial properties such as offices and stores which have multi-year leases, residential leases are typically reviewed annually, which means they tend to track inflation more closely.
Even before Russia’s invasion of Ukraine in late February added to inflationary pressures, investors had poured money into student housing, rental apartments and affordable housing in Europe. They allocated 105 billion euros last year, compared to 67 billion euros in 2019, according to data from MSCI.
The approximately €32 billion that investors have invested in residential rental property this year represents a quarter of the total amount invested by institutions in European property.
Rental housing has proven to be a magnet for real estate investors at the expense of offices and retail, assets that typically make up a much larger share of real estate investment portfolios.
However, the bet is not without risks. With inflation running at 10% in a number of European countries, some analysts doubt landlords will be able to raise rents at a pace that preserves yields.
“There is enough data on residential rental, going back to the 1970s, that shows that at certain times [rent growth] outperforms inflation, sometimes it holds up and sometimes it underperforms. There is no such thing as a perfect inflation hedge, it’s never a direct link,” said Tom Leahy, head of real assets research at MSCI Europe, Middle East and Asia.
Greystar has been among the most active groups in rental housing. In May, he teamed up with Singaporean sovereign wealth fund GIC to buy student housing portfolio Student Roost for around £3.3billion, the biggest property deal in the UK in two years. The group said the new fund will allow Greystar to maintain its spending spree.
Greystar’s Allnutt brushed aside fears that a slowing economy will thwart efforts to raise rents, saying he expects them to keep pace with inflation in the group’s main markets, including the UK, Ireland, Spain, the Netherlands, Germany, Austria and France.
Basically, it’s because “there is a chronic housing shortage in all of our markets,” he said.
Although MSCI’s Leahy said the shortage of supply provided a cushion for long-term investors, there was no guarantee that rental properties would escape the effects of the economic downturn.
“In the short term, I think there’s an issue around tenants’ ability to pay,” Leahy said. “The cost of living crisis is already here. Institutional investors are going to struggle to raise rents by 8%.”