INREV institutional resi allocations triple over 10 years

Institutional investment in residential real estate in the INREV Annual Fund Index hit 22.7% in 2023, up from 6.6% in 2013. According to research by INREV, residential allocations have moved from being the smallest to the largest sector across single-sector funds, while office and retail have contracted. Residential allocations in multi-sector funds have also increased. In its research paper, “Unlocking affordable PRS to address the twin challenges of housing need and decarbonisation”, INREV said institutional investors were keen to invest in intermediary affordable PRS because it “aligns with their financial objectives and their fiduciary duties to pensioners and savers”. PRS for the middle-income bracket preferred INREV’s survey found that 94.1% of investors and managers invested in the intermediary/affordable segment of the residential sector. More than half (52%) indicated that this segment accounts for more than 50% of their residential AUM. A further 30% included social or cost-rental housing in their residential AUM. The survey found that more than half of investors and managers aimed to set their target rental levels at a discount to market rent. Almost 50% factored total occupancy costs, including utility bills and local property taxes, into their calculations, targeting rents below 40% of gross median household income on a localised basis, while 60% aimed for target rents of less than 30% of gross median household income. Call for policy aid and clarity  Investors highlighted the need for more policy interventions to level the playing field for the provision of affordable housing. They said this was particularly important in markets where there were competing opportunities to provide for higher income households, or where limitations on land use and/or density made it challenging to deliver affordable rents. Between 25% and 29% of market participants said some form of intervention or public-private strategic framework such as tax breaks, lower cost of capital, accelerated planning, public grants or public co-investment was essential to the viability of their investment in affordable housing.   Decarbonisation essential Almost one-third, 63%, of respondents said investment in decarbonisation was not secondary to their financial objectives, and 57% saw it as a significant driver of financial performance over the long term. INREV’s research outlined how decarbonisation measures reduced energy, cost and price volatility. It said this had the potential to optimise rental affordability which, in turn, could increase returns for investors, thus maintaining the much-needed influx of capital to help ease the structural shortages of housing across most European markets.  However, the current constrained market conditions meant some investors and managers were being forced to delay capital expenditure on decarbonisation in order to preserve value. Respondents called for policy and regulatory intervention, such as carbon-pricing to better reflect the real value of high carbon assets. More than half, 57%, agreed or strongly agreed that help is needed to support the cost of decarbonisation associated with affordable housing. Iryna Pylypchuk, INREV’s director of research and market information, said: “The insights from this paper are extremely valuable in highlighting the significant contribution that the real estate investment industry is already making to address two of the biggest challenges of our time: the global housing crisis and the climate emergency. “What’s clear is that institutional investors and managers want to do more, but they need greater support at the policy and regulatory level. Indeed, over half of the respondents consider some form of public sector subsidy to be an important driver of investment strategy in terms of both the macro-scale capital allocation by country and the more micro-scale site selection.