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The Changing World of Real Estate

Alternatives
Real Estate

10/10/2024

Rosie Hunt Headshot

Rosie Hunt

Property Market Research

Infrastructure over river

IN A NUTSHELL

  • The European real estate market is diversifying in response to global mega-trends, including advancements in data and energy, a focus on health and well-being and the increasing demand for flexible lifestyles.
  • Niche sectors, including co-living and senior housing, data centres, self-storage and healthcare, are expected to become a larger part of the investable universe and increasingly integrate into core real estate portfolios.
  • Investing in niche real estate sectors at this nascent stage offers the potential for higher returns. As liquidity improves, we anticipate value growth, which could result in outperformance compared to traditional sectors.

The Evolution of Real Estate Portfolios

The real estate universe is ever adapting, with the composition of core portfolios constantly changing to reflect wider structural occupier and investor trends. Over the past two decades, a substantial shift in European real estate portfolios and investment activity has been evident. In 2007, for example, the office and retail sectors combined accounted for close to 70% of the annual all-property investment volume, a proportion which has consistently fallen to stand at 43% at end-2023.1 Similarly, having accounted for over 70% of the MSCI European Property Index in 2008, the office and retail sectors make up just 40% of the index value today (Chart 1). We expect office and retail allocations to continue to decline.

The logistics and residential sectors, by comparison, have recorded significant growth over the same period. Once arguably considered non-core, particularly the residential sector given the lack of institutional product, both are now key components of core real estate portfolios. Indeed, these sectors have grown from 22% of the value of the MSCI European Property Index in 2008, to over 50% today.2 Furthermore, having accounted for just 15% of annual European real estate investment volumes in 2007, the logistics and residential sectors combined made up 40% of investment volumes in 2023, having peaked at 47% in 2021.

With residential and logistics now an established part of European core real estate portfolios, some investors are looking elsewhere for diversification and higher return potential. With that, we expect niche and alternative sectors, such as data centres, senior housing and life sciences, to likely make up a larger proportion of the private real estate market going forward.

The Changing World of Real Estate
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