Now that interest rates have rolled over from their peak and property valuations are stabilising, we believe it is the right time to take a fresh look at the living sector. In the wake of a price correction across the asset class and based on the sector’s underlying performance characteristics, the European living real estate market is re-emerging as a significant opportunity for investors. Marked by its resilience, inflation-linked cashflows, consistent risk-adjusted returns, and a growing investment universe, there is ample reason for investors to take a renewed look at what the sector has to offer. 

Alongside our other recent publications focusing on rent affordabilityEuropean student accommodation and our more detailed review of the European residential market, this paper aims to summarise why living is considered Europe’s most preferred sector among investors today.

We believe it is the right time to take a fresh look at the living sector.

Living sector performance characteristics

Over the past two decades, European living real estate has been an attractive real estate investment sector, outperforming other sectors in terms of risk-adjusted returns. According to data from MSCI, European residential assets returned 7.2% per annum between 2001 and 2023, while experiencing the lowest total return volatility of all the real estate sectors. The resilience of European living was particularly evident during the Covid-19 pandemic. Our proprietary data showed that rent collection fell by just 3% compared with 15% in retail assets. Living did not escape the recent real estate correction unscathed, though, with values falling in response to higher interest rates. But commercial assets were hit much harder.

Resilience should be an ongoing characteristic in the future, too. The living sector faces far fewer negative disruptors from flexible working, ecommerce, automation, or operational obsolescence through technological change. We will always need bathrooms, kitchens, living spaces, and a bed in which to sleep. Long-term decisions in private real estate must be backed by conviction in the relevance of the underlying use of the buildings for the foreseeable future. Residential has the clearest and simplest long-term use case of all the sectors. That’s why it’s at the top of investors’ buy-lists. 

Residential has the clearest and simplest long-term use case of all the sectors. That’s why it’s at the top of investors’ buy-lists.

Total returns and risk characteristics across real estate sectors


Average total return 2001 to 2023 (%)
Standard deviation 2001 to 2023 (%)
Return per unit of risk (%)
Industrial
8.9 8.1 1.1
Residential
7.2 3.4 2.1
Hotel
6.4 3.0 2.1
All Property
6.3 4.3 1.5
Other
6.3 3.5 1.8
Retail
5.8 5.9 1.0
Office
5.6 4.7 1.2

Source: MSCI Pan-European Index, abrdn June 2024

Expanding investment universe

We believe the size of the European investible universe has reached critical mass to support pan-European living strategies. At an estimated €1.5 trillion, living assets represent a surprising 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 seven cities. This highlights the increasing relative importance and scale of the sector as part of the wider real estate market.

Investment in the European living sector has seen substantial growth over the last decade, attracting increased attention from cross-border and institutional investors. €16.5 billion has been invested in the sector in 2024, accounting for 23% of all real estate investment in Europe, the highest share across all sectors. Within the region, the dynamics are maturing too. In 2013, 50% of total living investment in Europe was in Germany. Year-to-date, Germany’s share has dropped to just 20%, with the UK, France, Sweden, the Netherlands and Spain taking a growing share of capital. 

Looking ahead, investor intentions surveys state living as their preferred sector over the next 12 months. This suggests the sector will continue to grow and converge with the more mature US market. 

And there is more growth to come. In the definition of ‘living’, we include more nascent subsectors such as purpose-built student accommodation, senior-living accommodation, serviced apartments, single-family rentals, and co-living. Each has strong demand fundamentals, further supplementing the private-rented sector and the build-to-rent segments. In PWC’s Emerging Trends in Real Estate Europe 2024, these living subsectors accounted for five out of the top 10 preferred segments by investors. The UK, France, Spain, and the Nordics offer particularly strong opportunities in these additional living subsectors, further increasing the potential breadth of living strategies across Europe. 

Investible living subsectors across the lifecycle and their indicative operational intensity

Source: abrdn

This growth hasn’t just supported the potential for specialist residential vehicles to expand across the continent, though. Institutional products, typically invested in purely commercial sectors, are also growing their residential commitments. In 2023, 14% of the MSCI pan-European Property Fund Index was allocated to residential assets (5.6% in 2019), falling just shy of retail at 15%. 

Demand and supply dynamics

Key demand drivers, such as home-ownership affordability constraints, urbanisation, net-migration and other demographic changes continue to support the sector. Europe’s cities are expected to grow by 6% on average between 2022 and 2035, while new housing development is predicted to fall by 10% over the next two years. Lead indicators sit at depressed levels, with data from Germany symptomatic of the wider European skyline. According to data from Munich’s IFO indicators, German developers haven’t been this negative towards future activity levels for nearly 25 years. They are planning to reduce headcount at the fastest rate since the Global Financial Crisis, while capacity utilisation (a measure of how full order books are) is at the lowest level in over 10 years. The sinking outlook for new supply is staggering in the face of increasing demand. 

The resulting challenge in housing affordability poses risks that investors need to understand and navigate. Indexation in lease terms and open-market rental growth both breached double digits in 2022, while headline rents increased by a further 7% across Europe over the year to the first quarter of 2024. Regulatory responses to these rental pressures also play a crucial role in shaping the investment landscape, but these policies have had a detrimental impact on supply levels. 
Diversifying across multiple jurisdictions is one way that investors can limit their exposure to policy changes in one particular market. They can also focus on the mid-market or intermediate rentals category, and with a limit of 30% to 40% ratio of rent-to-household income.

Importance of quality and sustainability

Sustainability and energy efficiency have become paramount, influencing asset values and investment decisions. The EU Building Stock Observatory estimates that 38% of the region’s housing was built before 1970 and only 12% of that share has been upgraded to meet climate targets. With decarbonisation deadlines ever closer, regulatory developments promoting energy efficiency are reshaping the investment criteria. Sustainability is now a pivotal factor in determining future performance. 

Look no further than the new carbon emissions tax introduced by the Bundesregierung in 2023, which forces a greater share of the carbon tax onto residential landlords in less-efficient buildings. Carbon units must be purchased to offset emissions. The cost of these units is currently fixed, but a step increase is scheduled for 2025 ahead of moving onto trading exchanges where pricing will be much more uncertain. In a sector where maximising net-operating income through cost control is the key to success, taxes levied on weaker buildings will further increase the importance of quality and sustainability as drivers of performance. 

regulatory developments promoting energy efficiency are reshaping the investment criteria. Sustainability is now a pivotal factor in determining future performance. 

Final thoughts…

While living has been a resilient real estate sector, we believe it presents a compelling investment opportunity at this point in the real estate cycle. The living sector is characterised by long-term structural demand drivers, low supply, growth potential, and differentiated fundamentals across subsectors. As the market evolves, adaptive strategies that prioritise sustainability and respond to affordability pressures will likely be key to achieving long-term investment success.