European Living Sector Outlook 2024

THE TIDE IS TURNING

LIVING FORECAST

KEY TRENDS TO HELP NAVIGATE THE REAL ESTATE MARKET IN 2024

THE TIDE IS TURNING

DEMAND FUELLED BY SECULAR

RATHER THAN CYCLICAL FACTORS

As mentioned earlier, we anticipate a gradual easing of monetary policy by both the European Central Bank and the Bank of England in Q3 2024, offering some relief. Additionally, forecasts indicate a decrease in construction cost inflation next year. Hence, there are grounds for cautious optimism that 2024 could mark a turning point from a viability standpoint.

Although there is unquestionable strength in demand, the living sector has not been immune to the challenging cyclical conditions that have affected various commercial real estate sectors in the past year. Escalating finance and construction costs over the last two years have exerted a negative influence on a living sector that was already grappling with inadequate supply and, arguably, facing an even more pressing need for output relative to other sectors. Additionally, increasing regulations, while well intentioned, are contributing to the growing burden of construction costs.

As we approach the end of 2023, the fundamentals of the EMEA living sector continue to be shaped by non-cyclical factors. In segments like senior living, the consistent aging of our population, coupled with rising life expectancy, serves as the primary catalyst for long-term demand. Conversely, in sectors such as privately rented and student accommodation, recent supply has failed to keep pace with robust demand, driven by trends like increased urbanization, declining

homeownership rates, and a rise in student numbers (both domestically and internationally). Consequently, a widening gap between demand and supply has led to an escalation in rent inflation in the post-COVID era.

PROJECTED POPULATIONS OVER 75YRS OF AGE (MILLIONS)

EUROPEAN CONSTRUCTION INFLATION FORECASTS*

14%

70

9.5

12%

9.0

65

10%

8.5

EU

60

8%

8.0

55

6%

7.5

50

4%

7.0

UK

45

2%

6.5

0%

2022

2023

2024

12.7%

6.5%

4.1%

6.0

40

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

Source: Turner and Townsend International Construction Market Survey 2023, *Average inflation rates across 15 European cities

Source: OECD, November 2023

4 LIVING OUTLOOK 2024

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RESILIENT TRAITS

CONTINUED INVESTOR DEMAND

According to our estimates, the living sector now consistently represents 20-25% of transactions throughout the EMEA region, with a majority of significant institutional investors expressing their intention to allocate more capital to this sector in the medium term. Consequently, we anticipate a recovery in living investment volumes in 2024, with this rebound becoming more firmly established over the medium term, especially as capital market conditions stabilise. Using the private rental sector as an example, we estimate that yields across the EMEA region rose by approximately 100 basis points in the year to the end of the third quarter of 2023. Looking forward, we expect yields to rise modestly in the first half of 2024 but for capital values to stabilise in the second half of the year initiating a more pronounced recovery in 2025.

The living sector now consistently represents 20-25% of transactions throughout the EMEA region. " In segments like the private rental and student accommodation markets in EMEA, a pronounced increase in rental inflation has prevailed in the post COVID period. While some signs of moderating rent inflation surfaced in certain parts of EMEA throughout 2023, the overall backdrop for rental growth remains positive. In the upcoming year, we anticipate that rental growth rates will likely ease from their current levels. However, with substantial supply-demand imbalances in many markets and viability acting as a significant obstacle to rapid expansion in housing output, a medium-term scenario characterised by gradual 'inflation plus' type increases in rents still appears most plausible to us.

Considering the steadfastness of the enduring demographic trends supporting living demand, it would be reasonable to anticipate a more defensively oriented return profile in comparison to other real estate sectors. The volatility of annual changes in capital values for residential assets has been markedly lower since 2001 when contrasted with the office, retail, and industrial sectors. Despite these resilient traits, investment volumes for the living sector declined in 2023, with EMEA transactions dropping by nearly two-thirds by the end of Q3 2023. This decline closely paralleled the reductions observed in other sectors. Furthermore, smaller-sized deals constituted a larger proportion of living investment volumes as the year progressed. Nonetheless, from our perspective, this year's slowdown should be considered within the context of a steady increase in capital into the sector over the past decade.

LIVING SECTOR CAPITAL VALUES HAVE BEEN LESS VOLATILE

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

8.1%

5.6%

OFFICE 4.0%

LIVING 2.8%

INDUSTRIAL

RETAIL

Source: MSCI, November 2023 *Refers to standard deviation of annual returns for sectors of the MSCI Europe Annual Property Index since 2001, Living = Residential

6 LIVING OUTLOOK 2024

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POLICY RESPONSES

GEOPOLITICAL LANDSCAPE

In the post-COVID world, housing has assumed even greater significance from a societal standpoint across the EMEA region, as evident in the European Union's Eurobarometer survey data. In the upcoming year, we anticipate housing concerns to linger over geopolitical matters, particularly with the impending EU Parliamentary elections in June. Furthermore, the possibility of general elections looms in the UK and Ireland in 2024, and fresh elections are scheduled for March in Portugal. In response to the prevailing pressures in the housing market, governments across the EMEA region have implemented various measures, with a particular focus on supporting private renters and first-time buyers. However, these efforts have so far done little to alleviate the pervasive sense of crisis in many European housing markets. As public concern about housing has intensified, rental controls have become more prevalent. Similar to recent regulatory changes, the underlying intention is commendable, aiming to enhance affordability.

Nevertheless, international research on the subject generally asserts that the short-term affordability advantages resulting from such measures often lead to a weakened medium-term supply—precisely the opposite outcome that EMEA housing markets need. Ultimately, addressing housing pressures in the region entails expanding output and alleviating obstacles that hinder the delivery of such output. Consequently, we see alternative policy approaches such as income supports and planning reform (which should help supply), as preferable to implementing rent controls.

Similar to recent regulatory changes, the underlying intention is commendable, aiming to enhance affordability. "

8 LIVING OUTLOOK 2024

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ESG AND REPURPOSING

KEY ELEMENTS IN THE LIVING LANDSCAPE OF 2024

ESG remains a pivotal theme that will shape living markets not only in the coming year but well into the future. For numerous real estate stakeholders within the EU, aligning with its taxonomy¹ of sustainable activities will be a central goal to ensure that their endeavours align with the objectives set by policymakers and investors alike. As investors increasingly recognise the necessity for and value of ESG in the real estate realm, such alignment is certain to gain even greater significance. Moreover, environmental legislation in both the EU and the UK, focused on enhancing the energy efficiency of housing markets, will help transform both existing and new properties, thereby inching closer to achieving carbon neutrality. Lastly, if there's a sector in the built environment where the influence of social factors is arguably most potent, it is in the living sector. The significance of where and how we live extends beyond our health and well-being; it also plays a pivotal role in addressing many of society's major urban challenges in the years to come. A notable opportunity could be the exploration of potential strategies for repurposing current real estate assets for residential use. In recent times, Cushman and Wakefield's ground-breaking research on office market obsolescence has brought attention to the fact that this challenge poses risks, but in the context of the living sector, it also opens up opportunities to transform surplus office space in the coming decade.

Progress in real estate repurposing across EMEA has been understandably sluggish due to the unpredictable macro landscape, uncertainties surrounding future office demand, the viability challenges discussed earlier, and regulatory and architectural obstacles. We believe there are no instant remedies for many of these challenges, although the relatively more favourable outlook for capital markets we anticipate in 2024 should help. Nevertheless, we still consider repurposing as a crucial aspect of resolving many of the existing supply-demand imbalances in living markets across EMEA. We expect it to evolve as a prominent theme over the next decade, particularly as capital market conditions improve and the hybrid working landscape becomes more defined. ¹ Taxonomy refers to what the EU has defined as sustainable activities. By aligning with that taxonomy it ensures real estate asset managers can still capitalise on future investor capital flows aimed at sustainable property investment.

As investors increasingly recognise the necessity for and value of ESG in the real estate realm, such alignment is certain to gain even greater significance. "

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Sukhdeep Dhillon Head of EMEA Forecasting Research sukhdeep.dhillon@cushwake.com

Tom McCabe Head of Research & Insights tom.mccabe@cushwake.com

Millie Todd Head of Living Research, UK millie.todd@cushwake.com

Catherine Bai Senior Analyst EMEA Capital Markets catherine.bai@cushwake.com

Andrew Smith International Partner Head of Student Accommodation, UK andrew.t.smith@cushwake.com

Mark Clegg International Partner Head of Residential Capital Markets, UK mark.a.clegg@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.