Investors know that in an uncertain world, global real estate has the potential to provide a premium to traditional fixed income. It can be a source of stable cash flows, it has limited correlation to other asset classes, and it offers the prospect of long-term inflation-adjusted returns.
The challenge, however, is differentiating between the various global real estate opportunity sets. This is particularly true in a post-Brexit world, where the once so-called safe housing market in London has already seen a dip in housing prices and rent. In the United States, political uncertainty and the slow-down in economic growth could mean that prices there may also drop.
Countries in Europe, on the other hand, are ripe for economic growth. A weaker euro and decreasing currency exchange rates against the U.S. dollar and pound sterling are helping international investors stretch their investments further in Europe, making them more lucrative than some of the more traditional safe haven options.
However, not all real estate opportunities in Europe are created equally.
In order to differentiate between the various global real estate opportunities, investors must look for niche sectors. Micro living projects for the student housing market in urban centers, like Lisbon or Porto in Portugal, are prime examples of a niche sector. Micro living apartments are convenient self-contained living spaces that include everything from bedrooms, kitchenettes and bathrooms. These private apartments include all utilities and access to cozy communal areas, as well.
Portugal, in particular, is poised for economic growth that will support opportunities in micro living solutions for students. The residential market in Portugal is currently cycling through one of its best performances ever recorded. Portugal’s strong residential market is driving a bold regeneration of Lisbon and Porto. The number of homes sold in Lisbon in 2015 was 70 percent higher than in 2014.
Rental investments for micro living solutions are exceptionally attractive. Rent prices are subject to surge as the demand for Lisbon rentals remains on the upswing. Rental yields on Lisbon apartments are 5.4 percent to 6.2 percent on average as of September 2016. Additionally, a 50-square-meter apartment in Lisbon boasts a 6.32 percent rental yield, while a 250-square-meter apartment returns a mere 4.2 percent rental yield.
For international students, Portugal remains attractive due to lower tuition and cost of living. In fact, 30 percent of all international students studying in Portugal are a part of the Erasmus Exchange Program, a foreign exchange program for students. There is an above average demand for affordable student housing and micro living in Portugal that has yet to be met.
Investors looking for niche opportunities can set their sights on the Portuguese student housing market. As demand increases, housing prices should slowly creep up to meet or surpass pre-existing highs, while providing strong returns for investors. Additionally, investors who wish to exit the market will not have an issue doing so, as housing prices should steadily increase, barring any unforeseen circumstances.
Although micro living in Europe is a compelling investment plan, these projects can come with risks that accompany their higher potential returns. The projects must be analyzed on a case-by-case basis.
Uncertainties will always exist for real estate investors. Whenever one asset class attracts significant attention, like real estate does today, it is important for investors to differentiate between the various opportunities and how best to capture them for the long-term return benefits. With real estate, this is all the more important in the growing niche categories. Thus, these investments will prove to be desirable for both short-term and long-term investor alike.
Rainer Nonnengässer is managing director at MPC Micro Living Development.
