Unlocking Europe’s living opportunity requires operational excellence and scale

Beneath the noise of a volatile start to the year, in our view Europe’s living sector is consolidating one of the most attractive long-term investment cases in real assets. It’s a sector where fundamentals are not only resilient but also strengthening. 

Marius Schoener, head of EMEA residential operator division at CBRE IM

Urbanisation continues to draw residents into Europe’s most productive employment centres. Vacancy rates in most large cities are at or near frictional levels and look set to remain tight.

On the supply side, barriers in core metros are stubbornly high. Planning is constrained, NIMBY-ism is culturally embedded and replacement costs have risen. Housing starts in most large European cities have been muted for several years and even with the political will to accelerate supply, new completions will remain low for the foreseeable future.

Affordability remains stretched with homeownership out of reach for many households, further entrenching rental demand. But there’s a catch. Financing costs as well as yields are expected to stay stable, therefore, yield compression will not be driving future returns.

A key driver of outperformance in the living sector will come from the operational layer. Operational efficiency starts with the selection and/or construction of the right buildings  but equally means controlling opex, managing obsolescence risk and achieving the scale required to drive efficiencies across an increasingly sophisticated value chain.

Against this backdrop, investors able to deliver modern, sustainable, and affordable residential accommodation in Europe’s most vibrant cities look set to be rewarded. Over 90% of our portfolio is concentrated in the continent’s top 25 metropolitan areas, reflecting our conviction that cities remain the gravitational centres of opportunity.  

The ability to actually develop is, of course, critical. Although the number of new building permits issued in many key cities is declining, investors with the right skill set can still aggregate robust pipelines of quality assets, provided they partner successfully with local developers. Sustainability also remains integral to value creation, with energy efficiency supporting cost efficiency and regulatory readiness and becoming ever more important to residents themselves. 75% of our portfolio has energy labels A and B.

In our view, affordability is an important part of our social mandate but is positive for investment performance too. 42% of our portfolio is classified as affordable, with rents capped at a maximum of 35% of disposable household income. This improves accessibility and stabilises occupancy, which strengthens community resilience.

In an era of thinner yield compression, outperformance hinges on net operating income (NOI). Residential operating costs are rising and highly variable and, left unmanaged, will erode returns. Costs also evolve as buildings age — obsolescence compounds through inefficiency.

There is no ‘cheat sheet,’ but there is an outline playbook for success. Focus on efficient new builds, build economies of scale, invest in future proof technology which helps to reduce management costs, such as tenant apps, and be disciplined about pruning your portfolio. Investors who stay laser-focused on operating lines will preserve or even expand, their margin of safety.

Scale is the engine that enhances returns derived from strong operational performance. Diversification benefits typically require 20–25 assets to reduce specific risk by around 95%. If operational efficiency calls for €50 million-plus asset sizes, then portfolios need to exceed €1 billion GAV to be fit-for-purpose. Scale also opens doors. Larger platforms access bigger transactions, programmatic development and portfolio deals that sub-scale vehicles simply can’t reach. Operationally, scale enables internalisation, tighter control of the value chain and justifies on-site teams and amenities that residents increasingly expect.

Cost ratios tell the story here - larger funds tend to run with lower Total Global Expense Ratios (TGER) and Real Estate Expense Ratios (REER), while smaller, newer vehicles face higher overhead burdens. At the capital structure level, scale unlocks portfolio-level debt including bond issuance and centralised hedging, a combination delivering lower cost of capital, better flexibility and greater liquidity for investors at exit.

In our view, Europe’s living sectors offer one of the clearest long-term opportunities in real estate today. But unlocking them requires a specific toolkit with a metropolitan focus, new-build efficiency, rigorous cost management, authentic ESG delivery and, above all, scale.