How to Overcome Rising Inflation in the Multifamily Housing Market?
A global outlook on the multifamily real estate sector
The GRI Global Committee’s kickoff session on multifamily & BTR took place on March 29th. The meeting gathered C-Level real estate investors, asset owners, operators, and developers.
*Disclaimer: While this review highlights the most relevant topics under discussion, it does not contemplate the full discussion between the Board and all Members. In addition, committee sessions also dedicate time for networking.
• The supply-demand has increased in Europe due to migration;
• As costs in energy and construction materials prices continue to rise, affordability in rents is key;
• In a broad sense, there is an urgent need for changes in regulation – open markets tend to perform better over high inflation;
• While managers are looking forward to cheaper land, innovation is the main hurry to further lower prices
The Multifamily & BTR sector is still considered a must-have for investors as sales show no signs of slowing down, despite global economic challenges over the last three years. Given the resilient attractiveness of this asset class, new strategies are expected in the market. However, the global inflationary environment also keeps on rising together with a growing population and recent migrations.
In Europe, particularly, a huge migration due to the recent refugee crisis is bringing challenges around supply-demand in urban areas. From a management perspective, meeting the increasing demand for urban locations close to work continues to be the main obstacle after the pandemic.
Regarding high costs of energy and construction materials worldwide, affordability in rents becomes a great issue as the current rising inflation is expected to be around in the next couple of years. For this matter, members operating from different countries were in agreement with the need for changes in regulation.
There seems to be not enough housing in urban sites and a number of regulatory barriers.
In this regard, the increase in yield for residential developments appears to be closely related to open and free markets. Finished markets, on the other hand, tend to backlog as the demand goes much higher than the supply. Differences alike were mentioned between Sweden and Finland.
The regulatory environment in the US shows signs of being closer to the market needs. In terms of tax benefits, members mentioned programs such as 421a Tax Abatement. This program, which might last for 10 to 25 years, should lower property tax bills to developers in exchange for affordable housing.
According to some members, these types of incentives further create housing not only for average median incomes in the area, but also further spur new developments in general.
However, inflation in construction costs continues to be a challenge worldwide despite tax programs once it affects several markets. Some developers reported an increase between 17 to 24% during the construction of new assets. Most were positive about a relevant capital flow into existing multifamily properties or new constructions that drastically reduce cost.
From some developers’ point of view, innovative methods were brought on as solutions for the astounding inflation in rents and materials. 3D concrete printing was mentioned as a pivot in terms of new buildings as it may reduce time in construction by half.
For some investors, innovation is indeed the most important hurry since yields are starting to cut, and “returns in new developments in five years are already unrealistic”. For the time being, however, leading multifamily investors might look forward to new buildings in a combination of cheaper land from secondary markets, with green building materials and several amenities – such as circadian lighting, hospital-grade air, and water filtration systems.
The increasing demand for multifamily assets in both secondary and primary cities can be a hurdle depending on government taxes and high costs of energy and material. Resetting expectations across the board is necessary. At the same time, the residential real estate sector has been resilient to the global economic crises over the last years. What is needed now is a better understanding of the technological innovation nuances and a better alignment between governments and the real estate market.
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