Developing at the start of the cycle for the strongest returns
Where are the greatest opportunities in the living sector right now? PATRIZIA Head of Investment Management Living Antonio Marin-Bataller offers his thoughts on this most promising of sectors.
Antonio Marin-Bataller,
Head of Investment Management Living
European living markets have undergone a significant repricing over the past three years – approximately 25% peak to trough on average — and are now entering a new cycle. With values rebased and the undersupply of modern housing intensified by a sharp decline in residential construction activity since 2022, with indices down more than 30% in major markets such as the UK and Germany, conditions are turning favourable for investors prepared to move early. Structurally supported by the long term DUEL megatrends (digitalisation, urbanisation, energy transition and modern living), the opportunity is no longer about waiting for recovery but positioning for what comes next.
One of the most common misreads of the cycle is the belief that early-stage development is too risky. In fact, historical evidence shows that risk-adjusted returns on development are often strongest at the start of a new cycle, when land competition is lower and rental growth is accelerating. Through forward funding and value-add capital, investors can mitigate planning, construction and financing risks while securing attractive returns ahead of the full return of core capital.
Investor appetite for secure, long-term income is resurging. Core residential real estate has demonstrated exceptional income resilience through recent market volatility, offering long-duration cash flows that are increasingly valued as a low-risk diversifier within multi-asset portfolios. Over the long term, residential assets consistently deliver net operating income (NOI) growth at or above inflation, reinforcing their role as a stable income generator.
For risk-averse strategies, residential real estate provides an additional advantage: strong correlations with pension liability hedging. Research from the Swiss Finance Institute highlights that multi-family properties are among the most effective instruments for securing pension liabilities. This is particularly relevant for investors seeking low-risk profiles, as residential real estate combines comparatively high excess returns with defensive characteristics.
Entering today, at rebased pricing, allows core capital the potential to capture outsized long-term returns from a new, healthier value baseline.
Driven by the DUEL megatrends we have identified, urban living environments are undergoing profound transformation. Continued urbanisation, technological innovation, sustainability imperatives and evolving demographics are reshaping the living sector and generating a diverse set of attractive investment opportunities. Across Europe and the UK, over the next two-to-five years, the strongest performance growth momentum is expected in living segments such as multifamily, student housing, affordable housing and single-family rental. Student accommodation is of particular note: structurally undersupplied in many European markets and still attracting deep pools of institutional capital. Moreover, as international student demand increasingly shifts away from Canada and the US due to more restrictive government policies, Europe is emerging as the study destination of choice for a growing share of global students.
The supply-demand imbalances in Europe’s housing markets are expected to intensify further, creating the need for affordable housing solutions across major urban centres. According to Eurostat, tens of millions of Europeans are considered overburdened by housing costs, spending more than 40% of their income on accommodation. PATRIZIA applies an even stricter definition of affordability: rent and energy costs combined should not exceed 35% of net household income. The structural housing shortage is not only limited to affordability but also encompasses housing quality, with millions of households living in overcrowded or inadequate conditions.
The public need for affordable housing is vast, and the political impetus to address this issue is accelerating. Governments across Europe are introducing ambitious programmes to close supply gaps and improve housing standards. The UK, for example, launched a GBP 39 billion Social and Affordable Homes Programme aimed at delivering 300,000 homes. Complementing this, the Mansion House Accord encourages pension funds to allocate at least 5% of their default defined contribution assets into UK-based investments and private markets, which has already resulted in a trio of pension firms committed to GBP 3 billion into impact investing by 2030. Private investment will be critical to bridging the supply gap and ensuring both affordability and quality in Europe’s housing stock. For investors, this represents not only a chance to generate stable returns, but also to deliver meaningful social impact in addressing one of Europe’s most pressing issues.
In a market defined by scarcity, rising living standards and significant housing needs, the winners will be those who act now to develop or invest into the next generation of high-quality rental housing, whether in core, impact or value-add strategies. Early movers will shape the cycle and capture the growth it offers.
PORTFOLIO INSIGHTS
Italian student housing highlight
One example from PATRIZIA’s portfolio perfectly illustrating the student housing opportunity is its PBSA scheme in Turin, Italy.
Turin is home to Italy’s fourth-largest student population with more than 100,000 full-time students. However, the city suffers from a severe lack of student accommodation, with just one bed for every 16 students which equates to a PBSA provision rate of just 6.5%.
PATRIZIA invested EUR 70 million in the forward purchase of the asset, which lies on Via Fréjus to the west of the city centre between the city’s prestigious Politecnico di Torino which has 33,000 students and the University of Turin with its 81,000 students. The development presented an exceptionally compelling investment opportunity for the company’s global client base.
For Turin, see London a little over a decade earlier. While PATRIZIA was an early mover with Dashwood Studios in Elephant & Castle – a 211-bed PBSA asset – the Turin PBSA acquisition reflected the tailwinds behind the sector in 2022, which are still present now.
Dashwood Studios was forward-purchased by PATRIZIA in 2011. An attractive proposition at purchase, supported by a location with excellent transport links and close to the city's leading universities, the development contributed to the wider urban regeneration in the area.
The asset achieved an internal rate of return (IRR) of 19.6% upon its sale, which demonstrates the appeal of capitalising on the urban and living transition in a market sector which was emerging at the time.
Multi-award-winning BTR development in the UK
Corkfield – PATRIZIA’s 375-unit build-to-rent development in the UK – began construction in January 2021 and completed in November 2023, yet was first in the company’s sights in 2014.
The asset is located in an undersupplied and prime spot in Birmingham.
Constructing during a downturn, the strong market fundamentals won out in the end with rents going up by 30/35% and tenants and investors alike pleased with the outcome.
Flagship Berlin development achieving rental rewards
The 1,700-unit Havelufer Quarter is designed for purpose-built shared living. It ranks as one of the most significant housing projects in Berlin. Around 100,000 sq m of rental space has been created to house more than 4,000 people. Construction started in 2021 and completed this year, the large development incorporates a wide range of living types, including build-to-rent, micro-living, family apartments and units for senior living. Rent achieved to date is 15% above the projected rate as per the business plan.