Whether it’s state-of-the-art student accommodation for Gen Z or care homes for retiring Baby Boomers, investors have been ploughing capital into Europe’s burgeoning living sector with volumes set to grow 30 percent this year.
Global investors could inject as much as €40 billion of new capital into Europe’s Living sectors (student housing, coliving, multifamily and healthcare real estate), JLL predicts.
The UK market has already seen record investment into the sector with an unprecedented £3.6 billion (€4.1 billion) invested in the first quarter. The activity comes off the back of a strong 2018 when more than £10 billion of assets were traded for the first time.
Increasing student numbers, urbanization, smaller households and an ageing population are driving the demand for these so-called ‘alternative’ real estate assets.
“These four factors are really driving the sector,” says Simon Scott, lead director, Living Capital Markets, JLL UK.
“We’re seeing global institutional investors look to both diversify from, and complement, their existing commercial real estate investments and there’s a growing sense that the living sector is a reliable, long-term sector to target for steady cashflow.”
The ability to generate income from a wide base, is a major draw for investors across all three subsectors, says Scott.
“Backed up by tenant demand, the prospect of large-scale vacancy in, for example, a student residence or retirement home, is low compared with, say, a single-tenant office, logistics or retail asset,” he explains. “That gives investors a considerable amount of clarity and confidence.”
The professionalization of the UK’s private rental sector (PRS) is a major boost, helping to raise its global profile and attract new capital. Japan’s biggest housebuilder, Sekisui House recently invested £22 million, in a UK modular homebuilding venture.
“Global capital can only be encouraged by the way PRS specialists have emerged,” Scott says, adding that it is not dissimilar to the progress made over the past decade by the more established student housing sector.
“The UK’s private rented sector can no longer be considered nascent,” he adds. “It’s matured, the number of sector-focused investors and likewise, joint ventures, is increasing – but it’s incremental.
“It’s taken a while for investors to see the opportunity. For some time, neither the stock or the level of specialized maintenance or management was there.”
Challenges to Europe-wide growth
While the UK and Germany currently dominate investment in living assets, France, the Netherlands, Sweden, Spain and Ireland, are also expected to see more demand from investors.
But, despite strong demand, supply is somewhat lagging across Europe. With a lack of investable PRS stock, for example, investors are now looking to “develop their own supply”, says JLL head of UK and EMEA residential research, Adam Challis.
“It’s been an impediment and has seen a move up the risk curve towards more development strategies,” he says.
For PRS to evolve further, there is also a need for more data, he adds.
“The ability to benchmark asset performance depends on a greater volume of data on rental levels and vacancy, something an emerging sector inevitable struggles with,” he says. “Being able to track the market – as investors in the more mature student housing and healthcare sectors are used to – is key.”
Yet new styles of living developments, such as coliving targeting young professionals, will provide fresh opportunities for investors who respond to changing lifestyle trends.
“It’s an area of living where managers can easily step sideways and fine-tune their already quality offer,” Scott says. “More and more operators are now talking about ‘consumers’ rather than tenants. That’s a positive sign for the future.”
Coliving currently accounts for around 10 percent of investor allocations but could play a bigger part in the living asset class in the coming years, according to JLL’s European Living report.
“While there’s inevitably some level of flux within those 20-somethings, coliving offers an extension of the student living vibe,” says Scott. “It’s helped and driven by the long-term trend of population growth in Europe’s major cities.”
With eight in ten investors looking to now expand into new European living markets, investment in the sector could soon exceed the €69 billion recorded in 2018, according to JLL.
That, says Scott, can only mean “more professionalism as the living spectrum evolves and expands”.