- Demand significantly exceeds supply for various forms of housing
- Share of investment volume in the residential sector in Europe increased from 6 per cent to 22 per cent between 2007 and 2023
- Regulations in Germany make residential construction projects considerably more difficult
The European residential market is set for significant growth until 2040, according to the report ‘Unpacking Europe's Living Revolution’ by Cushman & Wakefield, one of the world's largest real estate consultancies. Demand for different types of housing continues to grow in line with wide-ranging demographic changes and specific influencing factors such as affordability, urbanisation, an ageing population and higher educational participation, according to the study.
Housing affordability has declined across Western Europe in recent years and is expected to improve only slightly by 2040. For example, capacity in the UK has fallen by almost 30 per cent over the past ten years and by up to 50 per cent in other European countries, including Portugal and Ireland. Lower home ownership rates and continued strong demand for rental accommodation are the result.
‘Generation Rent’ and strong rental growth
This development has created demand from the so-called ‘rental generation’, which, in combination with a lack of supply on the rental market, has led to strong rental growth in European markets. Poland, for example, has seen an increase of 29 per cent over the past three years, followed by Portugal (15.2 per cent), the Czech Republic (12.9 per cent) and Spain (9.7 per cent).
Demographic changes and urbanisation are also driving this process. The populations of the major cities are expected to grow by 5 to 15 per cent by 2040 - London, Edinburgh and Dublin will grow by 5.4 per cent, 7.6 per cent and 14.1 per cent respectively; Berlin by 4.2 per cent, Hamburg by 3.9 per cent and Munich by as much as 6.1 per cent. This will further increase the demand for living space significantly.
At the same time, the number of people over the age of 65 is expected to rise by 20 to 40 per cent, which will result in increasing demand for purpose-built healthcare and senior living facilities. In parallel, tertiary education levels in Europe have risen from 25 per cent to 32 per cent over the past decade, impacting the younger end of the age spectrum. The demand for purpose-built student accommodation (PBSA) has risen in conjunction with this increase and the migration of students from Asian and African countries to Europe.
Focus on the German market
In Germany, demand for housing is being strongly influenced by the ageing population and ongoing urbanisation. Cities such as Berlin, Munich and Frankfurt will retain their appeal, which will increase the pressure on the housing markets there. In recent years, the German government has introduced various rent control measures to curb the rise in rents. However, some of these measures have led to a shortage of supply, which has further exacerbated the housing problem.
‘Investors and developers in Germany are faced with high construction costs and stricter building regulations, which makes the development of new residential projects more difficult. Nevertheless, the German market remains attractive due to its economic stability and solid demand for housing. The creation of incentives and support from the government could encourage the development of new projects and help stabilise the market in the long term,’ says Jan-Bastian Knod, Head of Residential Investment Germany & Healthcare Advisory at Cushman & Wakefield.
Institutional investors are pushing into the residential segment
Institutional investment volumes in the residential sector have grown exponentially across Europe, accounting for around 22 per cent of total volumes in 2023, up from 6 per cent in 2007. The residential sector is becoming an increasingly attractive investment option, with 70 per cent of investors citing greater demand and stable returns as key attractions.
The report found that the growing population and further urbanisation are the strongest indicators of the short-term risk/return ratio, while the early players in senior living in locations with an ageing population are well positioned for strong longer-term growth.
The residential sector will continue to increase its attractiveness to investors as the supply of investable segments grows. While student accommodation and build-to-rent segments are currently leading the way, senior living and co-living are also expected to grow.
Profitability remains a challenge for developers
A slight easing in financing costs has improved the profitability of development in the residential sector, although it is highly unlikely that interest rates will return to pandemic-related lows. Simon Jeschioro, Head of Capital Markets & Investment Advisory at Cushman & Wakefield Germany, emphasises: ‘With interest rates and construction costs remaining high, profitability remains a hurdle to a rapid expansion of housing supply in the short term. Although there is no short-term silver bullet solution, government support to relieve developers' construction costs and more efficient planning processes could make a significant difference.’
‘The European residential sector is facing a revolutionary change, driven by demographic and societal megatrends. The challenges are great, but with the right political and economic framework conditions, investors and developers can capitalise on the sector's enormous growth potential. Long-term stability and consistent regulation are key to balancing the housing market and meeting the needs of the European population,’ summarises Tina Reuter, Head of Germany at Cushman & Wakefield.
