JLL. Growth opportunities in living
Key Takeaways of the Research
Shifting capital allocations will favor the living sector
The living sector’s cash-flow stability and operational resilience is garnering increased attention, driving appetite and liquidity for suitable assets from buyers and lenders. In fact, living boasts the least volatile total return profile of any major real estate sector and the second highest average annual return over the last decade. As construction pipelines accelerate and investible inventory broadens and deepens in new geographies, opportunities to gain exposure to the sector will expand. JLL anticipates that the living sector will account for one-third of direct real estate investment globally by 2030.
Supply-demand imbalances support long-term investment thesis.
Demand drivers underscore the sector opportunity. Urbanization in recent decades has resulted in supply-demand imbalances and housing affordability challenges in many markets. Demographic shifts are further benefiting demand, as traditional catalysts for homeownership – of note, marriage and childbirth – are increasingly delayed, prolonging the tenancies in rental accommodations of renters by necessity as well as those by choice.
Living provides investment diversification benefits through cycles and downturns
Shorter lease terms and the needs-based nature of the living sector allow for resilient
performance through cycles. Operators’ ability to adapt quickly to market conditions can
minimize turnover and protect property income. Living product had the highest total returns during the Global Financial Crisis and more than 90% of residents paid their rent during the height of the pandemic in the U.S. and United Kingdom.
Investment broadening and intensifying as liquidity heats up
Leading institutional markets allow for direct and indirect investment at scale. The U.S. market has stood in a league of its own, boasting the largest inventory and most diverse lender and investor pools. However, the growing availability of comparable assets in transparent markets with favorable demand fundamentals has broadened opportunities to more markets, such as Germany, the United Kingdom and the Netherlands. Over the past decade, the count of markets with more than US$2 billion in annual direct transactions has increased from 5 to 11. Elevated liquidity and cross-border investment is now trickling from the most institutional to intensifying markets, including Canada, Japan and France. This is expected to further broaden to 20+ markets by 2030.
Nascent markets present opportunities for yield, but with increased deployment complexity
Growing fragmented markets – including Spain, Portugal and Ireland – offer investors the abilityto acquire smaller scale assets with relatively higher yield from private owners. Living portfolios in these markets are beginning to consolidate, and construction pipelines are increasing in secondary cities. Additionally, high barrier markets such as China and South Korea offer tremendous demand tailwinds but with increased regulatory risk and market entry constraints.
The upside potential in these future growth markets is significant but often requires joint ventures or alternative investment structures to deploy capital.
Growth opportunities in living are significant and quickly evolving
As the sector globalizes further, markets across the world will shift amongst market segments, and new markets will come into the fold. Remaining at the forefront of changing market conditions will provide investors with unique opportunities to expand, diversify and capitalize on the growth of the living sector over the next decade and beyond.