Residential real estate presents several advantages: the products are very liquid, the prices are relatively resistant to economic hazards, the prime yields are very attractive, and they have a strong potential for capital gains at resale.
Residential buildings, as a whole or divided into individual units, allow investors to diversify and to secure their portfolios. The location of the property is a determining requirement to be taken into account, as well as the typology of the properties, the evaluation of their liquidity and their rental situation.
Housing assets are one of the essentials of the real estate market. Often split into small-surface lots, they are characterised by a more complex rental management and administrative costs that are higher than tertiary buildings, but their potential for capital gains is high.
These are very liquid products that create good value for capital. The prices are less subject to downwards fluctuations than in office real estate, which is why residential real estate is a safe bet with good resilience in times of crisis. It also often benefits from high-quality locations in big cities.
Abandoned by institutional clients for a long time, residential real estate is currently experiencing a revival of interest. Transactions in old properties, reservations for new properties, and new construction sites are reaching levels that haven’t been seen in France since 2000. Prices are regularly increasing, with an average increase of 4%, going up to double that in large cities. Similar trends can be found to a lesser degree in other European countries and should continue this way in the years to come, especially in France, thanks to a dynamic demographic, continuously low interest rates, and public policies that favour construction and renovation. Since 2013, institutional investments have progressed to an annual average of 7,4%.
Finally, residential real estate offers prime yield rates that are very attractive: they can surpass 4%, while rates for offices can go under 3% in certain central parts of Paris.
Alongside family offices, historical institutional actors on the market are insurance companies and mutual funds, joined also by the tax-exemption OPCI and SCPI funds. With divided quality residential portfolio offers, it’s not always easy for institutional clients to invest in large volumes. However, the breaking up of this offer fosters property liquidity. Institutional clients can either resell properties as a whole to other investors, or individually, unit by unit, as they become available naturally. Residential properties are therefore attractive diversification assets, with good management of the risk/profitability ratio and good visibility on long-term cash-flow. They allow investors to create holding funds that ensure relatively stable revenues and to accumulate the capital gains generated by the sale of the buildings.
In residential real estate, the location of the property is an essential valuation criterion. The valuation will also take into account the typology of the assets, the needs of the market, and the liquidity of the properties. Finally, the rental situation is also a crucial element because it determines the return on the investment.
The valuation of residential real estate properties takes place based on a double approach: the comparison between the value of the empty lot and the value of the occupied lot as a unit, and the capitalisation. The estimated value will be confirmed by the discounted cash-flows method.