European Living Investment Outlook 2025: Recovery on the Horizon

After weathering a challenging 2024 marked by ongoing market repricing, muted investment activity, elevated interest rates, and rising construction costs, the European living sector appears poised for recovery in 2025. The latest Cushman & Wakefield European Living Investor Survey reveals growing investor confidence and presents a compelling case for renewed optimism in this resilient asset class.

Living Sector Growing in Prominence

The living sector has steadily gained popularity over the past decade as investors have recognized the stability and diversification benefits it offers. This trend is evident in industry benchmarks like MSCI, where the weight allocated to living has increased notably to around 23% for Pan European indices and 9% for UK indices.

Despite broader market challenges, the living sector's resilience was demonstrated last year, accounting for approximately 23% of total European investment volumes—equivalent to about €45 billion. The Private Rental Sector (PRS) dominated with €33 billion in investments, while Purpose-Built Student Accommodation (PBSA) attracted a further €6 billion.

The 2025 survey results underline the sector's growing importance, with approximately 60% of investors indicating allocations of 20% or more to living assets. Looking ahead, around 80% of respondents expect their investments in the sector to increase over the next five years, reinforcing a long-term commitment to this asset class.

Evolving Preferences Across Living Segments

Rising Interest in Student Accommodation

One of the most significant trends emerging from this year's survey is the surging interest in Purpose-Built Student Accommodation (PBSA). An impressive 75% of respondents plan to increase their exposure to PBSA over the next three years, making it a key target for investors in 2025.

The investment case for PBSA remains compelling, underpinned by solid fundamentals and rental growth that consistently outpaces inflation. The segment may also be benefiting from less regulatory focus compared to the traditional PRS market, where rent controls have been increasingly implemented across parts of Europe in recent years.

Co-living's Rapid Expansion

Co-living has emerged as the fastest-growing segment within the living sector, with 44% of respondents expecting to invest in it by 2028, up from 33% today. While this model is well-established in Germany and increasingly serves both student accommodation and broader residential needs, its expansion in the UK is accelerating rapidly.

Investor and lender confidence in co-living continues to strengthen, supported by successful schemes such as Folk's Sunday Mills in Earlsfield and Dandi's Wembley Park development. These projects have achieved strong lease-up rates and demonstrated robust rental growth potential. Additionally, the higher density of co-living developments helps navigate planning and viability constraints in urban locations, making it an increasingly attractive proposition in the current economic environment.

Shifting Sentiment on PRS/BTR

A notable shift compared to last year's survey has been in Private Rental Sector/Build to Rent (PRS/BTR) sentiment. In 2024, nearly 90% of investors were looking to deploy capital into this sector over the next few years, but this has fallen to 73% in 2025. Regulatory pressures and planning challenges continue to weigh on BTR development schemes in the UK, though the expected increase in operational and stabilized assets this year may provide new opportunities for investment.

Geographic Focus and Deal Structures

Key Target Markets

When it comes to investors' geographic preferences, core European markets remain the primary focus at this stage of the cycle. The UK, Spain, and Germany continue to be the top three geographic markets of interest to investors in 2025, with Spain replacing Germany as the second most favored market in this year's survey.

Beyond the top three, investors expressed greater preference toward France, Italy, and Portugal compared to last year, while the Nordic countries and Ireland moved slightly down in the rankings. This shift may reflect evolving opportunities across different European markets as investors seek diversification and growth potential.

Preferred Deal Structures

The survey reveals a broad mix of preferred deal structures for the living market, with forward commitments, stabilized stock, and joint ventures all featuring prominently. The percentage of investors citing forward commitment as their preferred deal structure rose most visibly compared to last year (29% in 2025 versus 18% in 2024), potentially signaling anticipation of a more stable period ahead for pricing and financing conditions.

Investors also seemed more likely to focus on repositioning as an option compared to last year, which could reflect a greater flow of such opportunities now coming to market. Although repositioning across European markets has been something of a 'slow burn' in recent years, it is likely to become a more prominent part of the living landscape as greater clarity emerges on issues like future office demand and viability.

Economic Outlook and Yield Expectations

Overall, investors maintain a cautiously optimistic view of the European economy in 2025. While almost half of respondents expect the European economy to weaken this year, this sentiment is less downbeat compared to the 2024 findings. Furthermore, there were larger pockets of positivity this year, with 37% of investors seeing the European economy strengthening, up from only 12% in 2024.

Regarding interest rates, most investors expect rates to fall throughout the remainder of 2025. A slim majority (52%) expect interest rates to fall by up to 0.5%, however, a further 46% expect rates to be cut by up to 1.5%. These anticipated interest rate cuts are also expected to benefit prime living yields, with just over half of investors feeling that prime living yields would fall by up to 0.5% this year, while around 20% anticipate no change in yields.

Performance Expectations and Market Challenges

PBSA Projected to Lead Performance

Improving deal volume in the student accommodation segment supported stronger investment performance last year. With fewer regulatory constraints and shorter lease terms than PRS, PBSA has proven to be an effective inflation hedge, consistently outperforming the wider residential sector. Nearly half of respondents expect PBSA to remain the top-performing living sector in 2025. Its appeal has been further reinforced in markets like the UK, where government policies have sometimes exempted PBSA from certain residential regulations.

PRS ranked second in terms of performance expectations, with 27% of respondents predicting it will be the best-performing subsector in 2025.

Key Challenges Ahead

While investor appetite for living sectors remains strong, several barriers could challenge growth ambitions. The most pressing concern among respondents is the mismatch between buyer and seller expectations, with some investors wary of pricing inflated by overly optimistic growth assumptions.

Political and regulatory uncertainty is another major risk, cited by nearly one-fifth of respondents. With new regulations under discussion and already imposed in several European markets, the potential for sector disruption remains high. Scotland and Ireland serve as stark examples, where the introduction of rent controls led to a significant drop in build-to-rent activity and muted investment interest.

Development viability represents another major challenge, cited by 17% of respondents. Higher construction costs, stricter building regulations, and increased affordable housing requirements have placed pressure on project feasibility and delivery across both the UK and Europe.

By contrast, concerns over debt costs have eased substantially, with only 4% of respondents now viewing it as a major barrier to investment. This shift reflects the improved outlook for interest rates across Europe, which should inspire greater investor confidence around capital deployment in 2025.

Sustainability Remains a Key Consideration

Policy initiatives in areas such as energy consumption and sustainable finance have quickly made sustainability a key topic for real estate investors, particularly in the living sector given the importance of energy efficiency in housing and its societal importance.

Over 70% of investors polled saw sustainability as a key objective of their investment portfolios, while more than half also said they would be willing to pay a premium for living assets with strong sustainability characteristics. Interestingly, however, the feedback from investors indicated that sustainability was less of a consideration for occupiers, with only 46% of investors highlighting that it was a key tenant factor.

Conclusion: Brightening Investor Outlook

Europe's living sector continues to offer a compelling long-term opportunity to commercial real estate investors thanks to its strong growth potential, linked to ongoing demographic and societal changes as well as significant supply-demand imbalances. These powerful structural trends remain very much in place, a key reason why the sector has grown to account for around 20% of European investment volumes.

In contrast, the cyclical outlook has been more uncertain in recent years, but conditions for a recovery are now falling into place. Confidence is a critical ingredient of any real estate recovery, and although investors cite pricing mismatches, viability, and political/regulatory change as ongoing challenges, the 2025 European Living Investor Survey reflects growing optimism in several areas.

Investors expect to increase their allocations to the living sector over the medium term, expanding across a broader range of segments—a positive sign for its continued growth and evolution. Student accommodation, in particular, is set to be a major beneficiary of this trend, while co-living and other alternative residential formats are gaining momentum. Meanwhile, anticipated interest rate declines in 2025 are likely to drive a rebound in capital values after two challenging years.

With political and economic developments continuing to shape the European housing landscape, investors who can navigate the sector's complexities while addressing sustainability requirements may find significant opportunities in this evolving market. The methodology behind European real estate valuations will be crucial for investors seeking to identify appropriate price points as the market begins its recovery phase.