Co-living is coming and offers a potentially large new sector for investors keen to tap into new accommodation trends.
Recent research points to the living concept becoming a global, not just a Western phenomenon, spurred on by the growth of cities, pressure on housing, living costs and changed expectations from a new generation of city dwellers.
According to new research from JLL, the European total of co-living beds built or in development is just 23,150, with almost two-thirds of those launched within the last two years. The sector has grown to almost 25,000 beds in the last two years and will continue to grow at pace as more markets emerge.
“The co-living market is being driven by consumer demand, and in an era of free movement, globalisation, technological advancement and greater social mobility, flexibility is an essential component of living,” note the report’s authors. “As habits and lifestyles change, we are witnessing the disruptive effects this is having on many traditional sectors.”
The report draws up a “co-living index” that ranks 40 city locations across the Continent, giving investors a flavour of those markets with greatest immediate opportunity, and those where there may be longer-term value. Its top five locations are Amsterdam, London, Copenhagen, Paris and Berlin. Pricey housing markets, good demographics and a strong student population are all strong indicators of likely demand, say JLL.
“In a relatively small but fast-growing market, innovative and entrepreneurial platforms are influencing how these homes are designed and operated. As such, schemes show heterogeneity and blur lines between traditional understandings of different living sectors.”
While early-stage conversions are at a smaller scale, it appears the opportunities are at scale, in larger purpose-built developments. “Our research shows that investors are looking to increase scale. In the development pipeline, the average asset size is larger than 250 beds.”
One major issue with smaller living spaces, and shared amenities, is that these can sometimes come into conflict with existing planning rules, and space standards. The agents note that legislators are going to have to grapple with these issues. While co-living spaces might not fit outdated regulations, they are attractive to younger people who want “plug and play living”, and fulfill a need to provide somewhere to live in a central location, at a price younger people can afford.
For those struggling to understand the target resident, Knight Frank attempts to explain: “For the millennial population, job mobility is the primary priority and home ownership is secondary. Home ownership is a decision postponed for later stages of life until they are well settled in their jobs and family life.”
Further afield, Knight Frank has been taking a look across Asian markets, where it says co-living is gaining traction – albeit, it is early days. “Co-living, like any new disruptor, will need time to find its footing and place to co-exist with other existing forms of residential real estate currently available to consumers.”
India already has an established base of co-living operators, and Knight Frank lists Zolostays, with more than 10,000 beds, as being one of the leaders. CoLive, which started in 2016, is not far behind with more than 8,000 beds while both CoHo and Stanza Living number portfolios above 2,000 units. The companies are achieving high occupancy rates, all in excess of 80% with some over 90%, say the agents, and a supply-demand imbalance, exacerbated by existing landlords being biased against younger renters, is a ripe opportunity for the co-living sector”.
“In India, the co-living concept is gaining widespread acceptance and has brought to the fore some new models in the private rental sector. Though the concept is novel, it’s here to stay, as India’s millennial population currently accounts for 440 million.”
It notes that Weave Co-living, which is backed by Warburg Pincus, expects to grow to 10,000 units across Asia by 2023. So far, the brand has 260 units across three properties in Hong Kong, where peer company Oootopia, backed by ARCH Capital, is also growing and should have 355 rooms by the end of this year.
One challenge, for investors looking to move into co-living from the residential rental space, is that co-living demands an easy-in, easy-out rental model, with short notice periods, and minimal tenant deposits. Student accommodation providers, in contrast, will obtain year-long commitments from their occupiers. That puts the onus on active management, to ensure consistently high occupancy in properties oriented towards young professionals.
In the UK, one recent funding move aims to help accelerate the growth of the sector in London. COLIV, a fund launched by DTZ Investors, aims to grow to GBP1bn and will back co-living developments in the UK capital. The aspiration is to support up to ten individual projects, with a mix of owning completed projects and funding developments.
“Co-living is an ideal response to the needs of London’s rented housing market, building on the principles of quality, convenience and community,” said DTZ Investors’ CEO, Chris Cooper. “This fund will bring forward a strong social agenda through: the buildings and places we create; the manner in which we engage with our communities and; the way in which we foster wellbeing for members.”
DTZ has teamed up with London co-living developer The Collective, which will have its next project funded by COLIV. It aims to provide investors with an attractive core-plus return, investing over a four-year period.
While the co-living preoccupation is with younger residents, researchers at CBRE point to a development in Sweden as an example of where single, shared living could go. Fully 47% of households in the country are single, and plenty of more mature people are also used to living in co-living developments – often with generous provision of shared spaces. One block in Stockholm sees 50 residents sharing 4,000 sq m of communal space. “Communal living isn’t just about affordability – and this development also counters the perception that co-living is for ‘renty-somethings’. Residents are aged between 40 – 100, most are empty nesters, and half are retired. People of all ages are genuinely looking for more meaningful ways to live together.”
HA Perspective [by Andrew Sangster]: The market is abuzz right now with the whole idea of buildings with beds. The phrase “beds and sheds” is a favourite with the property adviser crowd, reflecting the fact that buildings-with-beds and logistics are seen as the two big growth areas.
Savills published a report entitled Global Living last month which looked in-depth at what was happening in this buildings-with-beds segment. While the first half of 2019 saw offices remain the biggest asset class for investment volumes globally (transactions above USD10m were considered using Real Capital Analytics data), residential was firmly in second place. Add in the volume for hotels (which had a weak-ish first half) and the buildings-with-beds asset class is chasing the total for offices on a global basis.
The biggest sub-sector of the residential asset class is multi-family. This accounted for more than USD210bn of activity in 2018 of which USD45bn was in eight core European markets, says Savills. In Denmark, Sweden, Netherlands and Spain, multi-family investment was greater than for offices.
Co-living is a subset of multi-family but benefits from the same core drivers of the move towards renting driven by the increasing unaffordability of ownership, particularly in urban areas. In addition, the notion of sharing living space to enhance community and convenience has risen in popularity.
The buildings-with-beds segment starts out with student accommodation, moves onto co-living for first-jobbers and singles, and then to build-to-rent for families. Ultimately, you end up with elder housing and care homes.
Savills points out it is the young and the elderly that are shaping demand for some of the real estate industry’s fastest-growing asset classes. And these trends are determining how institutional investors are allocating funds.
The German open-ended fund Union Investment, for example, put three-quarters of its total property investments into residential in the first half of 2019, according to Savills / RCA, up from just 12% two years ago.
And Union is not alone, Aberdeen Standard Investments last year launched the first open-ended property fund to invest in residential property on a pan-European basis.
For hotel investors, all this might merit a shrug of the shoulders and query as to what it had to do with their market. But the bigger investors are already investing across all forms of operational real estate and the lines between asset classes are increasingly blurred.
Hoteliers have the skill sets to operate these sorts of buildings that feature communal areas, require high levels of service and need to be yield managed to maximise returns.