This transformation is rooted in how individuals now work, live and play. Accelerated by the Covid-19 pandemic, there has been a societal move toward multifunctional living spaces and away from single-purpose commercial spaces, a trend showing no signs of slowing. This evolving human experience is driving momentum in the market through several compelling catalysts.

A diversification play for today’s world

Once attractive only to the most savvy and hands-on real estate investors, a broader pool of capital is now looking at residential real estate, attracted to its ability to serve as a counterweight to economic cycles. Unlike commercial real estate, residential isn’t as influenced by economic boom-bust cycles or global trade policies and is instead driven by demographic trends such as population growth, household formation and urbanization – all of which are steadily trending upwards in markets across Europe. Positioning residential investments alongside commercial has the potential to create a more balanced portfolio and smoother return profile, which is especially appealing in today’s volatile economic environment, where investors are navigating stubborn inflation, higher interest rates and geopolitical tensions.

Institutional investors have historically been more comfortable underwriting commercial real estate because of its perceived simplicity: a single lease to a single tenant and one credit profile to evaluate. When a single professional counterparty, often with an investment-grade rating, signs a long-term lease, that effectively creates a credit instrument that makes the cash flow appear stable, and the risk is straightforward to price. By contrast, residential assets are hyper-fragmentated, with hundreds of individual tenants on short, rolling leases that expire at different times. For many investors, this has presented a steeper learning curve, requiring new ways of evaluating both the creditworthiness of a population and the operational risk of keeping a building leased and occupied.

But while commercial leases may seem simpler, they are not necessarily a safer bet. A single lease exposes an asset to significant concentration risk, and fixing terms over long periods can result in failing to keep pace with evolving market dynamics, especially in periods of high inflation or structural change. Residential assets, by virtue of their fragmentation, offer more resilient cash flows. The frequent renewal of leases allows rents to adjust to market conditions more regularly, embedding real growth potential into the income streams. In today’s environment of elevated volatility, this dynamic is attracting a broader spectrum of investors who increasingly recognize that the operational complexity of residential is more than offset by its potential to deliver stable, adaptive and inflation-aligned returns.

Entering a new era of wealth building

While this all sounds great for the current economic environment, I often hear concerns about what happens when the economic picture improves. Surely, more people will look to buy rather than rent, which will impact the sector’s cash flows?

Just as institutional investors seek diversification, individuals are increasingly opting for renting to preserve liquidity, mobility and optionality. Buying a home in a single location is an illiquid and highly concentrated bet. While 20 years ago it might have been the best way to build wealth, younger generations have diverse alternatives today – such as through stocks, bonds and investment trusts – while retaining their flexibility. Just like our approach to work, living and play has changed post-pandemic, a shift in our approach to home ownership is poised to be a significant boon for the rental housing market.

Positive capital flows

Even those who do want to buy a home will be facing significant supply and demand imbalances across Europe. Historically, capital primarily flowed into U.S. residential markets due to their perceived homogeneity. Europe, on the other hand, with its fragmented markets, diverse currencies, cultures, legal jurisdictions and regulatory regimes, has seen significantly less investment. Last year, the transaction volume in European residential real estate was roughly a third of that in the U.S. ($44bn versus $127bn) despite the EU having approximately 60 percent more households and comparable proportions of renters (31 percent in the EU versus 34 percent in U.S.), according to 2024 data from real estate services firm JLL. This demonstrates considerable potential for growth in Europe.

Only now are a few players, including EQT, tackling Europe in a scaled way, which creates opportunity for further investment. This is especially true with the U.S. no longer being viewed as the safe haven it once was, with a weakened dollar and uncertainty from an ever-changing geopolitical environment.

Opportunities for further innovation

We can already see the impact of geopolitical uncertainty through foreign student enrollment in the U.S., which has declined in the past year, according to data from the Student and Exchange Visitor Information System. This trend could strategically benefit leading European universities and, in turn, the student housing market in Europe. Critically, student housing in Europe has already become more institutionalized due to fewer regulatory constraints, and serves as an important roadmap for where the broader residential real estate sector could head.

Every year, around 1 percent of existing housing stock becomes obsolete while continued trends around smaller household formation and urbanization drive demand and growth in European cities. The United Nations forecasts that Europe’s degree of urbanization will increase to 84 percent by 2050.

This creates the opportunity for investors to not only invest in residential real estate, but also invest in supply that appeals to certain groups. One example is the development of naturally occurring retirement communities (NORCs), which have nice climates and a reasonable cost of living, but don’t yet have sufficient housing. Technology and the emergence of AI could further accelerate this trend of “niching down” in the living sector by using technology to bring greater efficiency to operations and enabling residential to become a much more scalable asset class through the ability to quickly spin up regional solutions for operating properties with specialized services.

The confluence of these shifts – from evolving living preferences and demographic imperatives to a new era of individual wealth building – alongside residential real estate’s proven resilience against economic cycles and inflation has earned its position in institutional investment portfolios.

Despite this powerful transformation, though, the journey for the European living sector is still in its early innings. The region represents a potential opportunity for growth as we witness a strategic pivot of major players towards Europe, spurred in part by a less favorable U.S. investment climate and a weakened dollar. This isn’t a fleeting trend, but a fundamental reassessment of an asset class that has been ripe for innovation – from addressing obsolete housing stock and supporting urbanization to developing specialized living solutions for certain segments of the population. For discerning investors, Europe’s residential renaissance offers opportunities for long-term, stable and inflation-insulated returns as part of a global real estate portfolio.