Bruno Lobo • Managing Partner S+A Capital
The ‘living’ sectors, refer to real estate yielding assets that combined, provide accommodation for all stages of life, including student housing, multifamily, co-living, senior living, and aged care.
Projects within the living sectors are owned by institutional investors as operating businesses managed by professional operators with a focus on the creation of medium to long term value through the maximization of net operating income and compression of yield.
Once considered an alternative for European institutional investors, the living sectors are now mainstream asset classes having grown to become the 2nd largest in Europe which accounted for €73 billion of investment across the Continent last year.
The growth of the living sector in Europe has been driven by an increasing demand from institutional investors for long term yield from real assets, as well as a consumer demand for flexibility and convenience provided by specialized living formats with age-specific amenities, community creation and ´customer’ service.
The changing consumer demand in the Living sectors is driven by broader, long-term trends such as demographic shifts and technological innovations, which, combined with rapid urbanisation and increased mobility, are transforming working practices and lifestyles.
Due to the crisis, investment activity in the living sector is expected to slow momentarily as investors respond to market uncertainty and valuation challenges. However, while it is too early to determine the shape of the recovery, it is likely that strategies that benefit from long-term structural drivers will thrive and eclipse their 2020 levels in years ahead.
The recent period of confinement and new rules of social distancing will both cause changes to the sectors while accelerating previous trends and patterns. Some of the changes will become the ‘new normal’ while some of the previous structural trends will be reinforced and continue to shape the living sectors.
As a response to the pandemic, there will be an increase in demand for home offices, high-speed internet, and access to private outside space. There will also be a greater demand for public outdoor spaces and for lower density rural/ out of town locations.
As developers and operators explore ways to diversify sources of revenue, there will be a rebalancing of private and communal areas through flexible amenities that allow for multiple uses and adapt to changing lifestyles; and a growing emphasis on service provision and community through permanent on-site management.
For the amenities to stay relevant, they will need to retain the ability to reshape resident’s experience – who as ‘customers’, are the main source of revenue – and enable the shared experiences that create communities within the building over the lifecycle of the asset.
The rebalancing of private and communal areas, and increased focus on customer service and creation of communities will lead to the design of new building types that support community and interaction within the new requirements. The emergence of alternative forms of spatial and functional organisations will lead to a blurring of the Living sectors and cause its various sub-types to overlap and merge leading to the creation of new categories such as intergenerational living.
As the living sectors evolve, urban models will have to adapt, but cities will endure. While the pandemic strengthened anti-density discourses, it has also created an opportunity to steer its decentralising effects towards regional models centred around interconnected well planned towns with adequate social infrastructure. Density done right will still be necessary to enable the connections and interactions required.
Understanding the interplay between near-term cyclical changes and long-term structural trends is key for investors and developers. The living sector benefits from long-term drivers with low volatility and less uncertainty. Its resiliency is provided by the flexibility of the model which allows it to adapt to changing lifestyles throughout the entire lifecycle of the asset.
While investors remain in a period of ‘price discovery’ and risk mitigation, the longer the economy and real estate markets remain cyclically weak, the larger and broader the opportunity set will be. Providing that there is a long-term business plan and sufficient flexibility, the pandemic has created the context for deploying capital in long-dated strategies in the European Living sector at attractive risk-adjusted returns.