Structural shift to living sector continues

Global Real Estate Perspective, August 2021

The structural shift in portfolio weighting towards the living sectors became more deeply entrenched in Q2 2021. Investment appetite for the sector continued to accelerate across most markets and it is clear that real estate investors have now reached a transitional phase where living investment is of equal importance to the traditional commercial sectors.

Total investment volumes in the living sector reached US$115 billion in H1 2021 globally, with growth in the Americas and EMEA and a drop in Asia Pacific. The fall in Asia Pacific reflects fewer transactions by domestic Japanese REITs which were very active in H1 2020; however, overseas institutional investors have become more active this year and demand for the sector remains high.

Underscoring the sector’s defensiveness, multifamily reigns as the most liquid asset type in the U.S. and represents a widening proportion of liquidity as investors continue to increase their allocations to the sector. Many investors in Asia Pacific are also under-allocated to the sector and some owners are repositioning hotel, co-living and student housing assets into long-stay rental apartments. In Europe sector consolidation such as Deutsche Wohnen’s takeover by Vonovia will represent a large proportion of activity for investors that are challenged to identify and secure direct assets at a price that supports return ambitions.

Future trends: Consolidation and innovation will drive living investment
  • Remainder of 2021: The uneven economic recovery across the globe will impact living investment less than other sectors. The return to city centers will be watched closely for the extent of cyclical reversion to pre-pandemic demand trends, compared with some structural demand upside for locations and assets that offer greater flexibility and/or practical living space improvements. The impacts will vary across markets, but overall investment demand for living assets will continue unfettered throughout 2021.
  • Long-term: Cyclical shifts up the risk curve combined with a shortage of assets will provide a tailwind to forward-funding and forward-purchase deals, as well as corporate consolidation and joint ventures that emphasize access to development pipelines. ESG will disproportionately feature in Europe and North America as stronger environmental credentials and innovation around better living environments are already an important differentiator for students and multifamily occupiers. Expansion of later living models will face a bigger test from labor markets and inflationary pressures will support development of healthcare technologies that improve health outcomes and quality of life for residents.