The JLL Living Investor Survey, produced in conjunction with Aberdeen Standard Investments, is now in its third year. After an unprecedented 12 months, it provides insights into how investor attitudes have adjusted.
The survey consolidates opinions from over 40 respondents with over €100 billion (bn) invested in Living assets across Europe in total. Participants range from large, multinational fund managers to local, specialist investors and developers.
Demand for Living assets has remained resilient throughout the pandemic. In 2020, we saw €83.4bn invested across European Living, up 10% from 2019. It’s within this context the 2021 survey sits: capital looking for perceived ‘safe havens’, a search for stable income streams, and increased competition for the best assets.
It’s clear the pandemic is reshaping the future for Living assets. But there remains some uncertainty from both lifestyle and economic viewpoints, as well as near-term concerns about rent regulation and ESG-specific building requirements. Nevertheless, the survey suggests the outlook remains bright for the sector, with ample opportunities for investors.
If we take the survey responses as representative of the wider market, allocations could rise from 25% currently, to over 40% of total real estate investment.
How far can Living go?
Living currently accounts for 25% of all direct real estate investment in the EMEA region, up from 9% in 2010. If we take the survey responses as representative of the wider market, allocations could reach over 40% of total real estate investment.
Proportion of current investors looking to change their target allocations to Living
Moreover, many respondents are looking to either expand into new Living segments or new markets entirely, to diversify and take advantage of new opportunities. For new investments, investors regard multifamily as the easiest sub-sector to access, followed by student housing, while healthcare is the most difficult. Affordable housing and coliving are more niche, often constrained by regulation and lack of market liquidity.
The top three drivers for investing in Living are unchanged from 2019, but with favourable supply and demand balance overtaking the attraction of stable long-term income streams. Nevertheless, stable income remains a strong driver, given rent collections across many commercial real estate sectors have come under strain.
Structural and demographic issues also remain important. Investors in Living real estate often have a longer-term investment horizon, so can focus on the supportive structural factors underpinning demand for homes to suit different life stages.
Outside the top three drivers, 32% cited portfolio diversification, reflecting the value of uncorrelated assets in these uncertain times.
Top 3 drivers
Appetite for Living investments remains extremely strong, with respondents’ stated investment targets representing a total of €70bn in extra capital. However, the extent to which allocations can be reached depends on suitable stock being available that matches investment constraints, such as geography or return criteria.
- 78% identified a lack of suitable investment-grade opportunities as a barrier, up from 60% in the 2019 survey.
- 62% cited the sector’s low-return profile as a prominent obstacle to investment. Core Living markets have seen marked yield compression over the last 12-24 months, particularly for multifamily.
- 49% of respondents mentioned the difficulty of achieving efficient portfolio scale, with relatively few large portfolios available and the alternative of acquiring just one asset at a time.
The effect of Covid-19 on housing demand
The pandemic has undoubtedly changed people’s work and living habits in the short run, but its long-term effects are uncertain. The survey gives a glimpse of how Europe’s largest Living investors see the future.
71% of respondents believe the pandemic has increased demand for urban fringe locations, and 37% expect it will lift demand for inner-city locations. Yet, 32% believe rural locations will also become more popular. The results reflect the continued importance of city connectivity, albeit with a wider choice of location now possible.
Over one in five households across Europe currently rent at market rates, with many cities at much higher levels. But stresses on personal finances are set to disrupt the traditional home-ownership model that exists in many countries. Over half of respondents (55%) see demand for rental properties rising in the future, with only 3% disagreeing. Opinions regarding home ownership are more evenly split, with 32% agreeing demand will rise and 29% disagreeing.
One explanation for these results is that in many markets, especially major cities, purchase prices have increased in excess of rents in recent years. Despite low interest rates, many young professionals, families or first-time buyers cannot save the required deposit. So, more and more often, renting is cheaper than buying, and more flexible, a trend that’s likely to continue apace after the disruption of 2020.
The perceived investment outlook for Living sectors is incredibly positive, although with variations across the sub-sectors.
- Student housing is the sector thought most likely to see a year-on-year fall in investment. One-third of respondents expect a decline, versus 41% expecting investment to rise.
- 2020’s very positive view of coliving was dampened this year. Nevertheless, 59% of respondents still expect higher activity in this nascent sector in 2021.
- Expectations are highest for the multifamily sector, with 85% expecting further growth after a record year in 2020 (€62.4bn).Only 5% expect a decline. The expected overweight of capital targeting the sector will compress yields.
- Despite the operational challenges of 2020, respondents are very optimistic about the healthcare sector, with 66% expecting a rise in investment.
Sustainability and ESG investment are a priority for real estate investors. Indeed, 95% of respondents agree that future allocations within the Living sector will favour sustainable assets.
Of particular note are the growing numbers of investors who view sustainable Living assets as an opportunity for rental premium (69% agree; 7% disagree). And it’s encouraging that an increasing number of investors have sustainability criteria embedded in their corporate or fund profiles - 85% of respondents, up from 77% in 2020’s survey and 67% in 2019.
Most important ESG considerations
“There’s no place like home” developed a particular resonance with tenants and investors in 2020. For many tenants, ‘home’ became a place of both work and leisure, forcing a new appreciation for the living characteristics that matter. For investors, ‘home’ has become a far more comfortable investment sector and the turbulence of 2020 has only argued for growing allocations. Despite its maturity as the second-largest real estate asset class, the Living sector offers fresh opportunity, as the role of the home is recast.
Read the full European Living Investor Survey article