Taking inspiration from the late Charlie Munger’s problem solving frameworks, we will apply some of his mental models to a relatively simple question: Where should long-term investors look to allocate capital in European real estate today? The short answer would be to look to provide capital to the sectors in most need (those with the greatest demand/supply imbalance), at the most attractive price point, which would subsequently reward investors with the most stable and growing cashflows over a long period of time. Through this lens, the PBSA market in Southern Europe looks to be a leading contender.
PBSA continues to offer an attractive yield premium compared to the private rental sector, despite offering enhanced growth. Across Europe, there are limited PBSA rental regulations, with average rental growth increasing 11% over the past two years. The rental growth rate is even higher in acutely undersupplied markets such as Lisbon and Milan where the number of students has surged and new PBSA stock is just becoming available. On a relative basis, given the combination of enhanced yield (see Chart 1 for European prime yields) and higher growth versus other living sub-asset classes, PBSA is quickly solidifying its position as a key allocation for investors and ‘top of the class’ within the living sector.
Southern Europe PBSA market
Within PBSA, Southern Europe has exhibited some of the strongest rental growth. Diving into the data, helps us understand why. This rental growth has been a symptom of the acute supply/demand imbalance. PBSA provision rates (beds per student) are as low as 3% in Portugal, 4% in Italy and 8% in Spain, as opposed to 13% across continental Europe and 33% in the UK (see Chart 2). This supply/demand imbalance does not seem to be set to improve in the near term, but rather worsen, as new supply is not keeping pace with growing demand. The result being that unmet demand (shortfall of beds) continues to grow and now stands at over 500,000 students in Spain alone (see Charts 3 and 4). In this deeply undersupplied market, those operators that can provide students with the most affordable rents will most likely benefit from sustainable demand over the long term.
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Supporting documents
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