Global real estate services and investment firm CBRE is introducing the new asset class of “Modern Living”. The term encompasses Student Living, Serviced Apartments, Co-Living, Micro Living and Service Living for Senior Citizens. In the context of changing German metropolises, these segments are increasingly attracting the attention of occupiers and investors. With regard to their concepts and rental models, they share great similarities, albeit with a range of different, partly optional, bookable components.

The entire CBRE report, including precise definitions and differences between the individual segments, is available on the CBRE’s website for downloading.

Against the backdrop of regulations on planning, rent and fiscal issues that should not be underestimated, detailed location-related and use-case specific advice, supplemented by evaluations accompanying the expansion, acquisition, as well as concept development and potential analysis are indispensable.

Drivers of the strong demand

A key driver of the strong demand for “Modern Living” emanates from the almost 400,000 first-semester students in the 2022/2023 winter semester and from international students whose numbers have risen by 76 percent since the 2008/2009 winter semester in Germany. The 855,000 international employees and numerous young professionals flocking to the cities are also driving the demand for Modern Living concepts. Commuters, whose numbers have risen 14 percent over the period from 2017 through 2022, and who are required to live close to their place of work, either on a daily or weekly basis, also need temporary accommodation. Lastly, senior citizens, the number of whom is projected to grow by 36 percent to 18.5 million by 2040, will increasingly constitute a new target group for this segment. Service Living for Senior Citizens permits a concept to be established that offers an independent lifestyle, flanked by customized support provided in later life as needed. Similarly, Modern Living with its low-level or flexible demand for services is also attractive to tourists for longer stays.

Development on the investment market

The transaction volume was formerly extremely supply driven, meaning that, with demand running steady, investments were only curbed by the lack of fresh supply. More than €12 billion has been invested in the segment since 2016, principally in portfolios and platforms. In the pandemic year 2020, the volume declined sharply, but concerns that the Modern Living asset class would lose its appeal after the pandemic years and that there would be less occupier demand have proven unfounded. Stable fundamentals are also reflected in the marked recovery in the transaction volume during the years 2021 and 2022, with volumes again exceeding the ten-year average. At the present point in time, as part of the interest rate turnaround and the associated higher financing costs, investment in Modern Living has also declined considerably though the relative proportion in the overall volume has recently been trending up again. Interest in investment opportunities in the Top 7 markets (Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart) as well as in the traditional university cities continues to run at a high level.

“Determinant drivers of the keen interest in the Modern Living asset class consist, on the one hand, of the possibility of above-average rental agreements and fully inflation-proofed cash flows. On the other, the sub-segments of Modern Living lend themselves as diversification and yield drivers, above all for special funds focused on the residential segment. Pure theme funds are also increasingly being launched in the Modern Living subsegment,” Kiskemper says.

The appetite of domestic and foreign investors remains unabated despite currently subdued market sentiment induced by the interest rates. In this context, investors, along with concepts, from North America, the UK and Asia in particular, countries where Modern Living has already established itself as an asset class, are crowding onto the German market. These investors view the imminent maturing of the market as an opportunity of securing market shares at an early stage. German investors have so far accounted for more than 60 percent of the buyers, also due to their home advantage. Along with direct investments, participations, and takeovers of operator companies by international players have also been observed.

The current process of price finding, along with the lack of supply, are dragging on potential investments. The increase in construction costs and the high interest rate level have caused new build activity to decline significantly. Supply is unlikely to increase to any great extent soon, which will result in the ongoing imbalance between supply and demand.

In response to the current situation on the financial markets, the yield for individual sub-segments has also trended up. As a result, the average prime yield for Student Living in Germany’s Top 7 markets came in at 4.39 percent in the third quarter of 2023, which is around 0.8 basis points above the level posted in the year-earlier period.