Higher construction & financing costs and tighter EPC rules are likely to further constrain supply and drive rental growth, according to real estate investment and asset manager AEW.

The company has just released its latest residential research, which expects the residential property sector to remain appealing for investors given its defensive characteristics and ability to hedge inflation through income growth. AEW believes the long-standing residential supply demand gap across Europe will become even more acute. This is due to higher interest rates pushing demand for rental housing and new environmental legislation reducing the lettable stock.

Irène Fossé, director of research & strategy at AEW, commented: “While in the short term we expect some further yield widening for residential assets, the trend remains highly supportive of continued income growth and values with yield compression expected from 2024.

“A combination of rising mortgage rates supporting the rental market, a post-Covid return to cities underpinning the secular urbanisation trend, as well as positive household formation growth will continue to put further strain on already constrained supply. We expect this long-standing shortage of rental housing to become even more acute in the short term as EPC rating and sustainability regulations become effective and priced in by both occupiers and investors. These are already driving green premia for those assets with the best credentials in the investment market.”

The key findings in the report include: