Living

The living sector is facing structural undersupply, with little relief in sight as developers continue to grapple with a lack of funding, lengthy planning procedures, uncertainty around exit values and more stringent regulations around sustainability. This will exacerbate the shortage of housing and put upward pressure on rents in 2024 and beyond.

Key Takeaways

1. A lack of new supply is the key theme for the living sector in 2024. Most cities are already facing a shortage of housing, and the development pipeline is expected to shrink further due to a lack of development funding, high construction costs, lengthy planning procedures and uncertainty around exit values.
2. Demand for housing across the living spectrum will remain strong, particularly in the larger European cities. This demand will be skewed towards the rental market, as an increase in mortgage rates has made renting relatively more affordable than home ownership. Despite mounting regulatory risk, an increase in market rents is expected to support solid income growth in 2024.
3. ESG will be an integral investment theme for 2024 and beyond. The European Commission’s Energy Performance of Buildings Directive gives more clarity on which sustainability targets need to be met, and when. The currently low ratings of much of the EU housing stock mean that there is a considerable challenge in renovating existing stock to meet energy efficiency standards.

Weak development activity to exacerbate pressure on affordability

Urban population growth will continue to drive demand for housing

Europe has seen strong population growth over the last decade, leading to an increased need for housing. Demographic trends such as an ageing population and a rise in the number of households, associated with a reduction in average household size, will continue to shape housing demand.

Household growth is particularly strong in large urban centres (Figure 13). In the capital cities of Europe, the number of households is expected to increase by 3% over the next five years. This will further support the demand for housing.

Construction cost growth easing but development likely to remain muted

With demand rising, most European cities are already grappling with a shortage of new housing development. Over the last decade, construction activity was 45% below the pre-Global Financial Crisis average and supply has not been able to keep up with demand.

Over the last 18 months, the development pipeline has dried up further, and will remain muted in 2024. Construction cost inflation is expected to ease relative to 2023 and the spike witnessed in 2022 (Figure 14), although upward pressure on costs remains, mostly driven by an increase in wages. In addition, challenges remain for the construction sector, such as a lack of funding, lengthy planning procedures and uncertainty around exit values. This will exacerbate the supply-demand imbalance leading to more pressure on affordability.

Figure 13: Number of Households in EU & UK Capital Cities

Source: CBRE Research, Oxford Economics 

Figure 14: Construction Cost Inflation in Europe

Source: CBRE Research, Turner and Townsend Construction Survey 2023

Growing stress on affordability leading to tighter regulations

The cost of living will remain elevated as higher mortgage rates reduce the affordability of home ownership, and limited new rental supply forces rents upwards. The average mortgage rate in the Eurozone and the UK is at its highest level since 2009 and is expected to stay elevated in 2024, which makes renting relatively more attractive in many markets. However, the rental segment was already overcrowded, and rising demand will push rents even higher. In some markets rent growth may reach double digits, while others are capped by rent controls. Tighter regulations however will further reduce supply. Vacancy will continue to be limited and, while regulation remains a risk, rising market rents will continue to support solid income growth in 2024.

Student housing and senior living to gain traction

Strong occupier fundamentals are also visible in other segments such as student housing and senior living. As highlighted in our report, student housing demand in Europe will remain strong in 2024 as the student population – international students in particular – continues to grow. Meanwhile, the ageing population is putting pressure on senior living stock. Consequently, occupancy in these subsectors is expected to remain high in 2024, driving rental growth.

Pressure to integrate ESG practices likely to intensify

ESG expected to be the key investment theme for years to come

More stringent regulations to meet sustainability targets will have an impact on the living sector in 2024. According to the Energy Performance of Buildings Directive (EPBD) adopted by the European Commission, the EU’s housing stock will have to achieve an EPC (energy performance certificate) rating of at least class E by 2030 and D by 2033.

As of 2023, 25% of the EU housing stock is below class E and 49% below class D1. While there is variation between countries, the overall challenge for the housing sector is substantial. Investors will need to plan carefully to avoid stranded assets, and demand for assets with strong ESG credentials is likely to intensify.