Savills IM releases its 2024 living sector outlook

The report offers insights on ten questions that Savills IM analysts believe investors should seek to answer before allocating in 2024.

Manchester city | Savills IM | BTR News
Manchester city.

International real estate investment manager Savills Investment Management (Savills IM) has announced its global outlook for real estate investment markets in 2024, highlighting several key sectors it believes offer rewarding opportunities for informed investors. The company says that 2024 promises a target-rich investment environment across Living, Industrial & Logistics, Debt and Natural Capital. 

Although higher inflation and bond yields provide a challenging backdrop for the sector in 2024, Savills IM believes that real estate will continue to provide highly attractive value creation opportunities for investors through compelling yields, capital protection or capital growth. 

The investment manager has identified the threats to the near-term macro picture, the most notable being a cautious approach from central banks to inflation. While interest rates may have peaked, it is likely they will remain higher-for-longer with no respite until late 2024. Moreover, it also believes that it is important to focus on fundamentals when identifying opportunities within real estate.

According to Savills IM, the road to net zero and sustainability efforts also remain at the forefront for investors, and measures to reduce buildings’ operational costs and protect against obsolescence due to regulatory demands continue to be an imperative.

Savills IM’s 2024 living sector outlook

  • Rent affordability is the issue for residents, policymakers and investors into 2024 and beyond. Demand continues to outstrip supply, and consequently the average household faces a marked deterioration in affordability and with limited alternative housing options.  
  • The answer lies in a major program of development, but the short term answer is that no quick fix exists, from either the public or private sector. Consequently, the prospect of policy interventions on rents through controls is rising. 
  • Investors should be mindful of the affordability thresholds of their residents and the risks of policy responses as the affordability crisis deepens. 
  • Long term, institutional investors can be part of the delivery of new supply. Short term they should take steps to reduce reliance on extreme, top-line, market rental growth.

“Urban industrial & logistics continues to be driven by strong fundamental factors and demand for modern, ESG compliant best-in-class assets create opportunities for investors. Elsewhere in the affordable housing sector, the role of private capital continues to grow in importance as part of the solution in ensuring the continued availability of homes for residents across Europe. Debt markets keep providing attractive risk-adjusted returns with strong downside protection. Against a backdrop of heightened cyclical market uncertainty, the stable income provided by senior real estate lending will remain highly attractive to institutional investors.”

Andrew Allen, Global Head of Research, Product Strategy and Development, Savills Investment Management

Opportunities in affordable housing for institutional investors

Elsewhere, affordable housing continues to be driven by fundamental supply-demand imbalances across all European markets. Rent affordability is consequently the issue for residents, policymakers and investors alike. In the year to 30 September 2023, average rent levels rose by 8.2% across Europe (ex-UK) and by 10% in the UK.

Against this backdrop, institutional investors have an opportunity to be part of the delivery of new supply in the long term, and in the short term should ensure they are not overly reliant on market-rental growth, instead focusing on affordability and minimising cost leakage. Prioritising residents will ensure longer tenancies, larger community benefits, and ultimately more stable income for investors.

“2024 will likely prove to be another challenging year for real estate investors. However, periods of high market stress will present opportunities to those investors with the requisite market knowledge. We see allocators tilting towards Living, Industrial & Logistics, Debt and, in increasingly, Natural Capital orientated strategies.”

Alex Jeffrey, Chief Executive, Savills Investment Management