Living Real Estate: A Resilient Sector with Promising Investment Potential
In the ever-evolving world of real estate, the "living" sector has emerged as a resilient and compelling investment opportunity. Characterised by long-term structural demand drivers, low supply, and growth potential, this sector, which includes student accommodations, senior-living residences, and privately rented housing, stands out for its differentiated fundamentals. As the market adapts, strategies that prioritise sustainability and address affordability pressures will be key to achieving long-term success.
The Resilience of Living Real Estate
Over the past two decades, European living real estate has consistently outperformed other sectors in terms of risk-adjusted returns. According to MSCI data, European residential assets delivered an average annual return of 7.2% between 2001 and 2023, with the lowest total return volatility compared to other real estate sectors. This resilience was particularly evident during the COVID-19 pandemic, when rent collection in living real estate fell by only 3%, compared to a 15% drop in retail assets.
Rising interest rates have driven a recent real estate correction, yet the living sector has shown remarkable resilience. While values fell sharply, commercial assets experienced a more significant decline. This stability positions living real estate as a top choice for investors looking for dependable returns in an uncertain market.
Growing and Maturing Market
The European living real estate market has reached critical mass, with an estimated €1.5 trillion in assets, representing 36% of the broader investible European real estate market. Substantial investment activity reflects this growth, with nearly €17 billion invested in the sector this year alone, accounting for 23% of all real estate investments in Europe—the highest share across all sectors.
The market dynamics are also maturing. While Germany previously dominated living investments, its share has decreased from 50% in 2013 to just 20% this year, with the UK, France, Sweden, the Netherlands, and Spain attracting more capital. This diversification highlights the increasing importance and scale of the living sector across Europe.
Moreover, the sector's definition extends beyond private-rented and build-to-rent segments, encompassing purpose-built student accommodation, senior-living residences, serviced apartments, single-family rentals, and co-living spaces. Each of these subsectors has strong demand fundamentals, further enhancing the sector's overall potential.
Favorable Demand and Supply Dynamics
Several key factors drive demand in the living real estate sector, including affordability constraints in homeownership, urbanisation, net migration, and demographic changes. We predict an average growth of 6% in Europe's urban areas through 2035 and a 10% decline in new housing development over the next two years. This imbalance between supply and demand underscores the sector's investment appeal.
However, the challenge of housing affordability remains a critical issue. Indexation in lease terms and open-market rental growth reached double digits in 2022, with headline rents increasing by 7% annually across Europe in the first quarter of this year. Regulatory responses to rental pressures, while necessary, have sometimes had detrimental impacts on supply levels.
To navigate these challenges, investors can diversify across multiple jurisdictions to mitigate exposure to policy changes in any single market. Focusing on the mid-market or intermediate rental category, with a rent-to-household income ratio capped at 30% to 40%, can also provide stability and growth.
Sustainability as a Key Driver
Sustainability and energy efficiency are increasingly influencing asset values and investment decisions. According to the EU Building Stock Observatory, only 12% of Europe's housing built before 1970 has undergone upgrades to meet climate targets. As decarbonisation deadlines approach, regulatory developments promoting energy efficiency are reshapinginvestment criteria.
For instance, residential landlords with less efficient buildings bear a greater share of the carbon tax burden due to the new carbon emissions tax that the Bundesregierung introduced in 2023. Currently, the cost of carbon units remains fixed, but a scheduled increase in 2025 and the subsequent shift to trading exchanges will increase pricing uncertainty. Thishighlights the importance of quality and sustainability as drivers of performance in the living real estate sector.
Finding
The living real estate sector presents a resilient and attractive investment opportunity. With its strong demand drivers, growing market size, and focus on sustainability, it offers dependable returns in a shifting economic landscape. By adopting adaptive strategies that prioritise long-term structural trends and sustainability goals, investors can capitalise on the sector's potential and achieve lasting success. The living sector, with its growing relevance and appeal, is a key focus for savvy real estate investors as the market continues to evolve.
Disclaimer: This information is for general knowledge and informational purposes only and does not constitute financial, investment, or other professional advice.