European Living Sector Outlook 2024

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

THE TIDE IS TURNING DEMOGRAPHIC | 7