Interest rates in Europe have started to decline from their peaks, providing a firmer foundation for property prices. This shift presents a renewed opportunity for investors to consider the real estate market’s “living” sector, which encompasses student accommodations, senior-living residences, and privately rented housing. Although this sector has seen its prices fall, it remains attractive due to its resilience, inflation-linked cash flows, and consistent risk-adjusted returns.
Over the past two decades, European living real estate has proven to be a resilient investment, outperforming other sectors in terms of risk-adjusted returns. Data from MSCI reveals that European residential assets returned an average of 7.2% annually between 2001 and 2023, experiencing the lowest total return volatility among real estate sectors. During the COVID-19 pandemic, abrdn’s proprietary data showed that rent collection in this sector fell by just 3%, compared to a 15% drop in retail assets. Although the recent real estate correction in Europe impacted living real estate, commercial assets were affected more severely. The sector’s resilience is expected to continue, as it faces fewer disruptions from flexible working, e-commerce, and technological changes. Residential properties, essential for daily living, remain a top priority for investors due to their enduring relevance.
The European investible universe for living real estate has reached a critical mass, supporting pan-European strategies. Living assets, estimated at €1.5 trillion ($1.6 trillion), account for 36% of the broader investible European real estate market. JLL estimates that nearly 20,000 new apartments will be created through office-to-residential conversions in Germany’s top cities alone. Investment in the sector has grown substantially, attracting cross-border and institutional investors. This year, nearly €17 billion ($18 billion) has been invested in the living sector, making up 23% of all real estate investments in Europe, the highest share across all sectors. The distribution of investments within Europe has diversified, with countries like the UK, France, Sweden, the Netherlands, and Spain gaining a larger share of capital.
Investor surveys indicate a preference for living real estate over other sectors for at least the next 12 months, suggesting continued growth. The definition of “living” includes various subsectors such as purpose-built student accommodation, senior-living accommodation, serviced apartments, single-family rentals, and co-living. Each of these subsectors has strong demand fundamentals, contributing to the overall appeal of the living category. The UK, France, Spain, and the Nordics offer particularly strong opportunities, further expanding the potential of living strategies across Europe. This growth supports the expansion of specialist residential vehicles and increases residential commitments within institutional products. In 2023, residential assets accounted for 14% of the MSCI pan-European Property Fund Index, up from 5.6% in 2019.
Demand and supply dynamics in the living sector are favorable. Key drivers include homeownership affordability constraints, urbanization, net migration, and demographic changes. Europe’s cities are expected to grow by 6% on average through 2035, while new housing development is predicted to decline by 10% over the next two years. Indicators from Germany reflect a wider European trend, with developers planning to reduce headcount and capacity utilization at the lowest levels in over a decade. The challenge of housing affordability poses risks that investors need to navigate. Lease term indexation and open-market rental growth breached double digits in 2022, and headline rents increased by 7% annually across Europe in the first quarter of this year. Regulatory responses to rental pressures are crucial, with diversification across multiple jurisdictions helping to mitigate policy risks.
Sustainability goals increasingly shape the living sector. Energy efficiency and sustainability now influence asset values and investment decisions. The EU Building Stock Observatory estimates that 38% of the region’s housing was built before 1970, with only 12% upgraded to meet climate targets. Regulatory developments promoting energy efficiency are reshaping investment criteria. The new carbon emissions tax introduced by the Bundesregierung in 2023 exemplifies this shift, increasing costs for residential landlords in less-efficient buildings. As maximizing net operating income through cost control is essential for success, the emphasis on quality and sustainability will continue to drive performance in the living sector.
Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.
