Europe’s rent caps and red tape are threatening housing investment

The Government has pledged to build an average of 33,000 new homes each year from 2021 to 2030. Picture: Chris Ratcliffe/Bloomberg

As housing shortages cause rents to surge in major European cities, investors are queueing up to pour cash into new homes, only to be thwarted by a bewildering array of hurdles.

With office and retail real estate suffering from remote-working and online-shopping trends, property investors have earmarked an additional €82bn for residential projects in Europe through 2025, according to a Savills survey. But the quagmire of rules, regulations and red tape is standing in their way.

“There is all this capital that is looking to get into Europe,” said Mark Allnutt, executive director at Greystar Real Estate Partners, a private equity firm specialising in rental properties. “There is scarcity of supply and not enough existing stock, but there are barriers.”

Housing has become a thorny political issue for Europe, with struggles to find affordable living space contributing to social tensions and voter frustration. But there is no quick fix.

From rent controls to planning bottlenecks, the hurdles vary across Europe and will require sustained government action to unlock investment to eventually ease pressure on strapped households. Here’s a rundown of key issues in various markets.

Ireland

 Still suffering from a housing bubble that burst during the financial crisis, rent increases in Ireland are capped at 2% a year in perpetuity. That means the recent surge in inflation is not accounted for, weighing on investment in new supply.

The upshot is a worsening housing crunch and intensifying tensions. Agitators involved in violent riots in Dublin in November harnessed grievances as a lack of affordable homes collides with an influx of refugees and asylum-seekers.

The Government has pledged to build an average of 33,000 new homes each year from 2021 to 2030. But for developers, persistently high inflation means the numbers do not add up. “Rent control doesn’t have to be a problem,” but the rules need to align better with the costs and the risks, said Bob Faith, chief executive officer at Greystar.

Britain

The mere mention of Britain’s planning system is usually enough to draw a look of disapproval from real estate investors. Development decisions are in the hands of depleted local councils, and public input can hinder ambitious projects. 

“There are some councils that get it, and there are some that don’t,” Allnutt said. “Those that don’t get it outnumber those that do.” 

Local authorities typically have eight weeks to make a decision, or up to 13 weeks for major projects. But only two in 10 applications for big housing developments were resolved in that time between July and September last year, according to government statistics.

The prospect of new rules is also an issue. The Labour Party, which is leading in the polls, has pledged a series of reforms to tackle Britain’s housing shortage, while in London, Mayor Sadiq Khan has repeatedly called for limits on rent increases.

While caps might be welcome for tenants, they can perpetuate housing shortages in the long term by choking off incentives for new construction. 

That’s the case in Scotland, where landlords can only hike rents by up to 3% a year, according to the Scottish Property Federation. 

“The sector has been stymied by what investors consider to be high levels of political risk,” said John Boyle, the main author of the research.

Germany 

Fewer than half of Germans own their homes — one of the lowest rates in Europe — and while that means there are lots of investment opportunities in the rental sector, buying existing stock entails renovation risk. There is extensive supply of rental housing in Germany, but a significant portion is “very old and not fit for purpose,” said Greystar’s Faith.

Chancellor Olaf Scholz’s ruling coalition, which has failed to achieve a target of 400,000 new homes a year, shelved stricter efficiency rules for new buildings in September in a bid to bolster construction. 

But the move does little to counter high interest rates and surging construction costs, and investors remain nervous about when the rules will return.

“Housing construction urgently and quickly needs a boost, not further uncertainty,” said Felix Pakleppa, managing director of Germany’s ZDB construction lobby.

Strict rules on tenant protection make it even more difficult to attract investors. Government plans to further tighten regulations, such as lowering the cap on rent increases, “would lead to less new building rather than more,” said Rolf Buch, chief executive of Germany’s largest landlord Vonovia SE. “Legislators need to think about this carefully.”

Iberia 

Residential construction in Spain has been depressed since the last bubble burst more than a decade ago. The biggest bottleneck is sluggish administration. Developers complain it can take over a year to get approvals, adding to overall costs.

“In Spain, you have to be mindful of the time it can take to obtain a building permit,” said John German, who oversees Invesco's residential business in Europe. 

“Even if the land is zoned, it can still take a year or more to obtain a building permit to start on site.” 

There are efforts to unlock investment by spreading the risk. Spanish home developer Neinor Homes SA is setting up partnerships with investors like AXA IM Alts. 

Such initiatives are much needed, with the stock of new dwellings shrinking for 13 consecutive years and now at the lowest since 2007.