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Real Estate Living Sectors Move into the Mainstream

by Preqin

  • 13 Feb 2020
  • RE

From residential to student and retirement housing, structural undersupply in the living sectors is creating attractive opportunities as population needs evolve  

by Jose Pellicer, Head of Investment Strategy, M&G Real Estate

 

Helping to Fulfill a Social Need
The living sectors – residential property, hotels, and commercial accommodation from student accommodation to retirement living and care homes – are growing rapidly throughout Europe. Their popularity has grown significantly over the last decade and at 76% of non-mainstream allocations,[1] they form the largest component of what has previously been labelled the alternatives sector in Europe.

The living sectors in general remain structurally undersupplied, largely the consequence of an ongoing lack of housing development across much of Europe, particularly in capital cities with high employment opportunities. In addition, what housing stock does exist increasingly no longer meets the expectations of tenants, who are seeking more experience-led living space at a cost they can meet.

As such, providing tailored, affordable living that also helps to fulfill a social need offers an attractive opportunity for investors. 

Robust Fundamentals Underpin Living
Urban populations are growing, meaning demand for all types of housing is expected to rise. People are increasingly choosing to work, live, socialize, and retire in major towns and cities. This leads to rising urban densification and places significant pressure on existing resources.

The global middle class is also expanding rapidly, creating a wealthier, more educated, and technologically integrated global population, which frequently travels and lives abroad, with a particular focus on gateway cities such as London, Paris, and Berlin.

Rising demand for experiences over material possessions and greater lifestyle flexibility in all aspects of peoples’ lives has changed occupier requirements across the built environment, especially the living sectors. Consumers now increasingly expect high-quality, professional services alongside their space, though requirements vary across cities. Therefore local knowledge is key.

In addition, people are getting older and living longer, particularly in developed economies. This points to a need for a very different kind of housing in the future.

Structural Undersupply Supports Rental Growth
This combination of rising demand and continued undersupply of good-quality accommodation is expected to underpin strong rental growth across these sectors. In particular, we expect the private residential sector across continental Europe to demonstrate healthy income growth over the next few years.

While expected outperformance remains a key determinant behind rising investor interest, there are other, similarly important factors driving appeal.

Many of the living sectors also offer defensive characteristics, which are particularly attractive to investors in the late cycle environment. Valuations often hold up better than mainstream sectors during downturns. They exhibit lower correlations with other property sectors and asset classes due to different cyclical drivers, and therefore provide diversification benefits.

The living sector’s attractiveness is further enhanced by its strong social links, with housing generally very high on many governments’ agendas, particularly given rising affordability and supply issues.

Vast Living Universe Reflects Attractive Opportunities
There are a variety of opportunities within the living sector that can complement investors’ existing commercial real estate portfolios.

Student housing in continental Europe is entering a growth phase, given the rising numbers of students studying abroad, looking for safe, well located accommodation that can be easily arranged. Countries such as Italy, Spain, and the Netherlands, for example, offer an attractive balance between students’ educational and social demands.

Care homes and retirement living across Europe reflect a major opportunity to improve the supply and quality of accommodation since the prospect of living longer equates to a greater need to maintain living standards. However, with most governments facing budget cuts, there is an opportunity for institutions to bridge the gap.

Private renting at an older age as a means of accessing better amenities is also becoming more commonplace. In the Nordics, for example, both the concept of renting and the elderly healthcare system are more established, meaning the investment universe is typically larger than in other markets.

The diversity of Europe’s private rented market means its potential investment universe is vast. Different countries offer different characteristics including lease lengths, growth, and income potential – the latter often dependent on the level of regulation.

Complementing the opportunity in living, the hotel sector is relatively mature across most countries, with rising global demand underpinned by the emergence of middle-income Asian travelers visiting Europe. Long-lease hotels have become a relatively core investment class, given typical inflation-linked leases. Franchise and management contract hotels offer greater opportunities to drive enhanced risk-adjusted returns, once again tapping into long-term structural demand drivers.

Investors Tap into 21st Century Living
The living sectors present an opportunity to tap into the underlying growth trends of 21st century living. Consumers now demand an increasingly seamless experience with their living accommodation, which spans an entire lifecycle: from their early 20s as students, to developing their careers as young professionals, before starting a family and eventually retiring.

Europe’s vast living universe offers a variety of income and growth characteristics, alongside its defensive qualities and diversification benefits. We believe these factors make it an attractive long-term proposition for investors.

 

[1] MSCI Europe Annual Property Index, December 2018.

 

This article is taken from the 2020 Preqin Global Real Estate Report. For more expert commentary on the real estate industry, please visit: preqin.com/grer

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M&G Investments
At M&G Investments we look for the best opportunities to invest, on behalf of people who care how their money is invested. As a long-term, active manager, we offer solutions across a broad range of capabilities that span both public and private markets including fixed income, equities, multi-asset, real estate, infrastructure, and private equity.

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