Why investors remain attracted by new multifamily development

Europe’s multifamily sector continues to attract investors keen to build new homes as a range of entry routes open up.

A record €22.5 billion was invested last year in European forward-funding multifamily deals, according to JLL data. That made up 39% of transaction volumes in the sector, excluding the €31.5 billion invested in two income producing platform deals in Germany and the Nordics. In Germany, just under a quarter of multifamily deals were for project developments last year, a record proportion.

Investors continue to commit capital to building new rental homes, partly due to the nascent nature of the multifamily sector but also by the potential to create scale, offer operational efficiencies as well as fulfill mounting ESG requirements.

But there are headwinds to currently consider, says Gemma Kendall, head of multifamily investment, EMEA Capital Markets at JLL.

“Appetite is clearly there and remains high,” she says. “However, construction costs, which have been rising for some time, remain a factor, as does the increased cost of borrowing given recent central bank rate hikes.”

It’s why investors who do not require finance may find themselves in a more competitive position this year, Kendall adds.

Partnering up

Competition – particularly in more established markets – has been pushing investors toward project funding and partnerships with developers.

As well as committing capital to developments and buying them upon completion, the partnership route remains more popular.

In the UK, private Canadian investor Realstar’s residential rental brand UNCLE is growing. Its third deal with developer HUB was agreed late last year in Leeds following on from schemes in north London.

Moving up the value chain

For many investors, access to the market has become critical given high capital allocations, Kendall says. But the opportunity challenge was accentuated during the COVID-19 pandemic as multifamily property become favoured for its resilience.

Forward-funded projects typically have a yield spread of 25-50 basis points against stabilized, income producing assets of similar quality, according to JLL.

“Multifamily yields have been compressing – and that’s another reason why we’ll continue to see many investors look up the value chain towards development opportunities,” Kendall concludes.