Resilience of sector attracts ongoing investor interest

Despite macroeconomic headwinds picking up during Q2, buyers continue to target the Living sector, attracted by its resilient cashflows, relative ability to match inflation and the sector’s sustained strong fundamentals.

Future trends: Difficulty of near-term deal-making counterbalanced by continued capital pressure

Short-term: Investors remain convinced by the sector’s strong fundamentals but will continue to face difficulties in deal-making in the near-term as pricing levels adjust. Development pipelines will provide more products for investors, notably in global markets where Living assets are structurally undersupplied. The increased cost of debt is the main stimulant for softening return profiles across the sector, while elevated construction costs will make it more difficult for forward deals to meet buyer price expectations. There is already evidence of a drop in available rental supply causing an acceleration in rental growth across many major cities globally, which is likely to intensify before reverting to trend.

Long-term: As market uncertainty recedes investors will continue to allocate high levels of capital towards the sector. Rising retail mortgage rates are set to provide a boost to rental demand as households (first-time buyers in particular) will rent for longer, coupled with lower new-build supply levels in the next 2-3 years. While rent growth is in the double digits now, it should moderate in 2023/2024 across the U.S. and UK as fundamentals normalize. ESG incentives will be increasingly important when buying Living assets as regulation advances and transparency becomes increasingly valued. Meanwhile, the Living investment universe will continue to expand through the growth of sub-sectors and activity in newer geographies.