Living sector lifted by income and demographic fundamentals

With maturing operating platforms and structural demographic trends, living assets are now seen as a core allocation for institutional investors, reports Jason Mitchell.

The living sector, once seen as a specialised niche within real estate portfolios, has now become an essential allocation for institutional investors.

Defined broadly, the living sector includes multifamily rental housing, single-family rental, purpose-built student accommodation (PBSA), co-living, and senior housing. These diverse assets share exposure to structural demographic trends, growing institutional liquidity and the ability to generate long-term, inflation-linked rental income.

As operating platforms mature and the investable universe deepens, the sector has shifted from a cyclical allocation to a strategic core for long-duration capital.

Institutional flows reflect this shift. According to JLL, the living sector accounted for 26% of total real estate investment in Europe in 2024 – ahead of logistics and offices. In its 2025 outlook, JLL expects volumes to exceed €60 billion for the year. Globally, total living investment volumes are expected to reach around $1.4 trillion over the next five years – roughly 14% higher than in the pre-pandemic five-year period.

This repricing is more than just market rotation: it reflects growing investor conviction in the sector’s long-term income profile and scalability.

Supply-demand imbalances continue to drive opportunity. JLL estimates that population growth across Europe’s 15 largest cities will reach 1.14 million between 2025 and 2030. However, the current rate of housing completions falls far short of this trajectory. According to Savills, for example, by the mid-2020s the UK is on track to deliver about 42% fewer new homes than officially targeted.

Planning constraints, cost inflation, and a shortage of skilled labour have further reduced supply elasticity. This persistent undersupply, across almost all subsegments, supports reliable income growth and long-term capital deployment strategies.

Outperformance data

The performance data reinforces this logic. INREV’s second quarter 2025 Fund Index reports that residential-focused non-listed funds delivered a 1.95% total return – significantly outperforming retail at 1.22% and offices at 0.58%. Income return rose to 0.82% from 0.50% in the previous quarter.

AEW’s European Residential Outlook, released in June 2025, forecasts average annual returns of 7.7% through 2029. This projection includes 4% income return and 3.1% rental growth, with little reliance on further yield compression. Investors are now focusing on operational strength and cashflow durability rather than capital appreciation.

The UK remains the most mature living market in Europe. CBRE recorded £4.3 billion in completed UK living transactions during the first half of 2025, including £1.9 billion in build-to-rent (BTR) and a record £2.7 billion under offer by the end of June. Knight Frank’s latest data shows that third-quarter volumes exceeded £850 million, up 35% year-on-year. More than 60% of the transactions by number involved single-family rental homes, reflecting a growing shift towards low-rise, suburban formats.

That pivot is intentional. Under the UK’s Gateway 2 fire safety regime, which mandates stricter fire-safety scrutiny for high-rise residential buildings, development approvals have been taking more than 35 weeks. In response, investors and developers are shifting to suburban sites, which offer faster permitting, simpler construction requirements, and access to a wider tenant base.

Long Harbour’s launch of a £1.6 billion single-family rental platform in July 2025 – seeded with £300 million from Korea’s National Pension Service – is an example of this strategy. The model gained further institutional backing when Aviva Investors and Packaged Living forward-funded 320 suburban homes in Bedfordshire in the UK earlier in 2025.

PRS gains traction

In Continental Europe, institutional single-family rental is still at an early stage, but momentum is growing. In Spain, investors deployed €1.72 billion into living assets during the first half of 2025, with Madrid accounting for approximately 40% of the total, according to CBRE.

Professional private rental sector (PRS) markets are gaining traction in the Netherlands and Poland. PRS refers to purpose-built, professionally managed rental housing designed for long-term tenancies, typically operated by corporate, institutional, or large private landlords.

Urbanisation, declining housing affordability, and a shift away from homeownership are reinforcing demand for rental accommodation in cities such as Gdańsk, Valencia and Eindhoven.

Multifamily remains the most significant living subsector by volume, but regional divergence is becoming more pronounced. In Germany and the Netherlands, political scrutiny and regulation – including rent caps and price controls – are dampening new investment. Conversely, Spain, Ireland and Poland continue to attract capital into mid-market BTR housing, where faster planning, clearer legal frameworks and favourable demographics support long-term returns.

Student accommodation continues to demonstrate resilience and scalability. The German Federal Statistical Office reports that 2.87 million students were enrolled for the 2024-2025 academic year, including more than 492,000 international students – a 7% increase year-on-year. Yet high-quality PBSA remains undersupplied in key German cities, including Berlin, Munich, Cologne and Hamburg.

Southern European markets, such as Spain, Portugal, Poland and Italy, are also experiencing rising student populations, but have weak accommodation pipelines.

Institutions consolidate market share

Macquarie Asset Management responded to this demand by acquiring Milestone and BaseStack Living in July 2025, creating a pan-European PBSA platform with 12,000 beds. In the UK, Unite Group’s £723 million acquisition of Empiric Student Property expanded its platform to £10.5 billion in assets, with more than 5,000 beds under development. As construction costs and operational complexity increase, institutional platforms with established brands and tenant loyalty are consolidating market share.

Senior living remains significantly underweight in institutional portfolios, despite strong fundamentals. According to Eurostat, by 2030, more than 30% of the population in France, Germany and Italy will be aged 65 or older. Yet institutional penetration of senior housing remains below 3% in most European countries. In the UK, the sector is more advanced, with several REIT-backed and private equity platforms operating at scale.

In June 2025, Franklin Templeton acquired a portfolio of 32 care homes comprising 1,500 beds. Around the same time, Omega Healthcare Investors bought a 46-asset portfolio from Four Seasons for £241 million. These recent lease-based transactions provide infrastructure and pension capital with access to the senior living sector without requiring full operational risk.

These lease structures – featuring indexation, longer terms and covenant-backed operators – are gaining support in Germany, Spain and Austria. Demographic pressure, smaller household sizes and growing care needs are reinforcing long-term demand.

A fast-growing asset class

Co-living remains a small asset class by volume, but is growing rapidly. Cushman & Wakefield’s July 2025 MarketBeat recorded 8,730 operational co-living units in the UK. Survey data shows that 44% of institutional investors intend to enter the segment by 2028. Younger renters and professionals, who have been priced out of traditional one-bedroom apartments, are leading demand. Active platforms are expanding in Lisbon, Madrid and London.

Operators claim that co-living can achieve gross to net spreads of 300-400 basis points above standard BTR in some markets. Operator quality, tech-enabled services and flexible lease structures are increasingly influencing investor underwriting. As with senior housing, lease design and operational leverage are key to achieving targeted returns.

INREV’s September 2025 Global IRR Index shows that funds launched in 2022 have delivered an internal rate of return of 6.84% since inception, while the broader, post-2019 cohort has recovered to 1.41%, up from negative territory in late 2023. Although INREV does not disaggregate IRRs for individual living subsectors, manager guidance and recent industry research provide a clearer picture of return expectations.

Promising IRRs

PGIM Real Estate’s July 2025 value-add strategy paper identifies operational residential segments – including student housing, co-living and senior living – as offering target net IRRs in the mid-single-digit to low double-digit range. Forward-funded living strategies across parts of Europe are commonly underwritten at 6% to 8% net IRR, with senior living and co-living platforms often targeting higher returns – above 8% – particularly where inflation-linked leases or value-enhancing operational components are in place.

Capital allocation is shifting accordingly. CBRE’s 2025 European Investor Intentions Survey ranked living as the most preferred real estate sector, chosen by 32% of respondents – ahead of logistics, retail and office. INREV’s financing sentiment index reached 67.3 in September 2025, its highest level since early 2022. The stabilisation of interest rates and debt markets is restoring confidence in long-duration, income-led investment strategies.

Returning to income-producing assets

The broader macro backdrop also supports this trend. With monetary policy now on hold and inflation easing, investors are returning to income-producing assets that offer downside protection and positive real returns. Eurostat’s October 2025 housing update showed that EU-wide house prices rose 5.4% year-on-year in the second quarter, while rents increased by 3.2%. This real income growth further supports capital deployment into residential markets, mainly where leases include indexation.

Shifts in real estate finance increasingly shape the growth of the living sector. CBRE’s European Lender Intentions Survey 2025 shows that residential and BTR remain lenders’ preferred sectors, with more than half of respondents planning to expand exposure over the next 12 months.

Typical loan-to-value ratios for stabilised residential portfolios are between 50% and 60%, underlining a more disciplined lending environment than before 2020. Development finance remains available, but is subject to stricter prelet, cost-certainty and sponsorship requirements. This recalibration of credit risk has prompted investors to rely more heavily on forward-funding structures and joint ventures, ensuring price control and delivery certainty in a higher-cost environment.

Alternative lenders

Alternative lenders and insurance-backed debt funds are expanding their presence in the living sector, providing flexible senior-plus and whole-loan financing to meet institutional demand. The resulting capital structure is leaner and more equity-led, reducing refinancing pressure and enhancing income visibility – reinforcing the living sector’s position as the most resilient and strategically scalable component of European real estate.

Within multi-asset portfolios, the living sector is increasingly valued for its combination of resilience, scale and alignment with long-term secular trends. It provides low correlation with GDP, protection against inflation, and the ability to scale through platform strategies, mergers and refinancing. As allocations to office and retail are reduced, residential assets are emerging as the primary income engine within many institutional portfolios.

Large portfolios dominate

Execution will ultimately determine performance. Investors that scale operations, optimise lease structures, manage tenant services and maintain cost control are in the best position.
JLL expects that portfolios above €100 million will account for more than half of all living sector investment in 2025. The largest managers are consolidating, while smaller players increasingly rely on partnerships or aggregation strategies to reach scale.

At the asset level, operational efficiency is becoming a key return driver, with larger platforms using technology, energy retrofits and professional management to lift net operating income and strengthen tenant retention.

Challenges remain, however. Development costs are high, planning systems are slow and political risk – particularly rent regulation – continues to create uncertainty. Yet most institutional investors now understand these risks and factor them into pricing. The larger opportunity lies in capturing long-term income from stable, socially vital assets with proven occupier demand.

The living sector no longer represents a tactical bet or defensive play. It has become a core strategic allocation – delivering income, diversification and resilience at scale – across both the UK and Continental Europe. As demographic pressures intensify and supply continues to lag, institutional capital will play a central role in shaping and scaling the next generation of investable residential assets. For investors focused on long-term outcomes, the sector offers a rare mix of structural need, cashflow growth and platform stability.