‘Over the past several years, investors have increasingly diversified their holdings to incorporate living assets – from student housing to multifamily, and into senior living and healthcare. This shift has been driven by the structural factors underpinning demand across these sectors, alongside their track-record of delivering strong riskadjusted returns. An economic downturn is not going to alter these fundamentals, or diminish the underlying interest in the sector.’

Living for the future

Continued urbanisation has driven up demand for housing in most global cities. At the same time we have seen city authorities struggle to deliver the necessary supply to keep pace. House prices have been driven up, making homeownership less attainable (compounded by a sharp rise in mortgage rates) and increasing the need for good quality rental accommodation.

At the same time, the world’s population is aging. Since the turn of the millennium, the number of people aged over 85 across OECD countries has almost doubled to 32mn. By 2040, around 28% of China’s population will be aged over 60, equivalent to over 400mn people. This is creating a growing need for housing and care options that are better suited to meet the needs of this cohort.

Of all the core sectors of commercial real estate, the fundamentals of living are perhaps the easiest to get behind. Investors generally agree. Over the past decade, we have seen annual investment rise more than threefold, which compares to the total growth of 70% for other sectors over the same period, almost all of which was driven by logistics. This strong growth has underpinned a rising share of living investment, which accounted for 30% of all capital deployed across real estate capital markets globally in 2022 (Chart 20). This is a marked rise from the 21% it accounted for only 5 years ago, and further cements the living sectors’ transition to the mainstream.

A healthy appetite for living

Despite the strong growth in investment, living sectors were not immune to the shifting macroeconomic backdrop in 2022. Over the past year the US$ 363bn invested globally was, like all sectors, down on the previous year. Valuations have adjusted to the higher interest rate environment, particularly in Europe. Multifamily yields across the top 6 markets in Germany moved out by 70bps over the course of last year, equivalent to a near 25% decline in pricing. Similar moves were evident in the Amsterdam, Madrid, and Stockholm markets. But the defensive qualities, future rental prospects, and strong fundamentals offered by living continue to attract investors. In the US, the US$ 281bn investment in multifamily in 2022 still represented a 46% increase in comparison with the pre-Covid peak in 2019. In Japan, yields have actually come in by 10bps to 3.3% in 2022, underpinned by fierce competition for the limited residential assets brought to market and the absence of upward pressure from interest rates.

Fundraising activity has also been resilient to the wider slowdown in capital markets. We have seen a number of significant fund raises for living strategies globally – many of which exceeded their targets. In Europe, Greystar closed a discretionary residential fund in mid-2022 after raising € 1.6bn (US$ 1.6bn), exceeding the initial target by more than 50%. Bridge Investment Group secured US$ 2.3bn before closing in January 2023 for their fifth flagship multifamily fund in the US, against a target of US$ 2.0bn, making it the largest ever dedicated multifamily fund; and Patrizia, a German fund, secured JPY 150bn (US$ 1.1bn) from a major Asian institutional investor for a new push into Japanese residential.

Rebasing expectations

Meanwhile, with more and more capital chasing opportunities in the living sector, the thirst for yield is leading to a shift in the locations that are the top of investors’ lists. In Europe, while Germany remains the largest investment market, more nascent markets including Spain and the UK have experienced strong growth. The latter is also a market in which over two thirds of the largest investors can continue to act with minimal or no gearing, underpinning continued activity through 2023. In the US, investors are following population migration trends out of the big cities and into secondary markets such as Atlanta, Dallas, Houston, and Phoenix.

It is clear that there remains a significant wall of capital looking for opportunities in living sectors globally, and the investment case remains compelling – targeting high demand markets that have become increasingly unaffordable and offer strong rental growth prospects as a consequence. European cities in general are starved of housing supply for example. And environmental legislation will have a major impact on the private rented sector, disproportionately hitting smaller buyto-let landlords, providing more opportunity for institutional supply.

In Asia Pacific, we are seeing growing investor interest in Australia’s burgeoning multifamily sector, with recent investment from Greystar and M&G; a trend we expect to continue through 2023. Current yields of 4% and above look attractive relative to other markets, and rental growth should be supported through a combination of record low vacancy rates and positive inbound migration trends. This will augment continued investment in Japan, where housing unaffordability in major cities is driving strong rental growth, and demand is being supported by a recovery of inflows of foreign nationals, with the country finally relaxing international travel restrictions.