Sharing co-living’s growth

The UK’s co-living sector is bouncing back, as Covid restrictions ease. The sector has seen renewed rental and improved occupancy, as leading players push forward with new developments.  

Data collated by Built Asset Management, a London-based accommodation manager, tracked co-living lettings rising 7% in May, 14% in June and 15% in July, as the sector’s target tenants experienced renewed confidence and pandemic restrictions eased.  

“It’s clear from the data that the impact of restrictions easing has been enormous when it comes to tenant confidence and market buoyancy within the PRS,” said Alex Gibbs, co-founder and director of BAM. “Our lettings data shows a marked and incredibly direct correlation between the lifting of restrictions on daily life and the number of lettings transacted.”  

The pandemic inevitably impacted business, with the knock-on effect on revenues forcing some to revise plans. As occupancy rates fell, many businesses looked to house NHS staff and key workers, and switched where possible to longer duration lets.  

“When the roadmap out of lockdown was then published, with late March/April seeing the first major signs of normal life returning, reaction amongst tenants was immediate and marked,” said BAM’s Gibbs, “resulting in the enormous 78% increase in agreed lets that we saw in March.” 

“From there, it’s been a positive, albeit steady, rise in lettings as more and more restrictions have been lifted. The data tells us that young professionals have regained the confidence to move into new shared properties, and to return to city life, as increasing numbers of offices and social establishments have re-opened their doors.” 

Leading UK co-living brand The Collective has reportedly hired Credit Suisse to conduct a strategic review of the business. The company, which has pipeline projects in the US, UK and Ireland, has operating sites in London and New York. Founder Reza Merchant retains a large minority stake in the management business, though individual projects are funded separately. The Collective previously agreed to work with DTZ Investors, with a fund acquiring the properties and The Collective managing them.  

With revenues pinched, in 2020 The Collective raised GBP160m to help keep the pipeline moving. Former Airbnb executive Chip Conley also joined the business, as an investor and advisor.  

In Westminster, the Collective has recently gone back to planners to improve on a consented scheme, previously bought for GBP21.25n and which was approved in 2020. There, an additional floor is being proposed, taking the development to 332 rooms.  

Elsewhere, restructuring is already well underway. In June, US based group Common took over the assets of Starcity, which had built a business of around 1,000 co-living units on east and west coast America, and in Barcelona, and had a pipeline of 6,000 more. Common had already taken over the apartment and co-living spaces of several smaller businesses across the USA, and has also absorbed two WeLive blocks, as the new management of WeWork scale back on its founder’s aspirations.  

Andrew Pardon, head of co-living transactions at CBRE, wrote recently that the niche should enjoy a strong future: “Co-living is the younger sibling of student accommodation and multifamily living. The resilience shown by these established asset types over the long term is likely to attract more investment in residential to rent of all types, including co-living.” 

He also pointed to the potential of a structural change due to the pandemic. “Co-living is more than a housing product and its appeal to residents is built on a change in the way people are choosing to live. There has been a steady shift in human behaviours and desires during the past few years; people are choosing community, wellbeing, sustainability and experiences.   

The world has pivoted even more strongly towards these ideals during the pandemic. They will become embedded in our psyche as we reflect on what we have learned during 2020. Co-living is here to stay.” 

Another brand seeking to grow in the UK is Fifth State, founded by former Knight Frank investment agent Alex Springer. The company is working with Wittington Investments, the investment arm of the Weston family, and student property manager CRM on a co-living development project in south London.  

Wilhelm Wrede, valuation advisor at JLL notes this is indicative of the blurred lines between very similar operational real estate niches. “CRM’s involvement with Fifth State is another example of PBSA operators and managers building a strong foothold in the co-living market. From an operational perspective, the commonalities between the two sectors allow for a straightforward transfer of expertise, while the more diverse occupational market diversifies risk and increases income potential.” 

HA Perspective [by Chris Bown]: The Collective has established a strong brand in the UK, and a decent pipeline – but there are others racing for the leading brand position in co-living. No wonder the consultants are helping Reza Merchant work out what to do next. A well-funded partner that can help catapult forward the brand’s growth would be just the ticket.  

And here’s the thing. Co-living, as a business, is not so different from hotels or student accommodation. So the potential list of partners could be broad…. 

Additional comment [by Andrew Sangster]: The prize with co-living is to get in now while yields are above those for hotels and student accommodation and then exit when yields drop closer to residential. If liquidity can grow and the perception of risk falls, then yields will surely fall. 

The comparison with residential is critical. Residential offers very significantly lower yields and hence higher prices than regular commercial property. But a key reason is the heavier regulatory involvement. 

In the UK, Colliers data shows commercial real estate saw in excess of GBP50bn of institutional quality transactions last year while residential attracted just GBP6bn despite being a bigger sector overall. But residential is seeing significant growth in institutional interest, particularly with the build to rent sector. 

The overlap between BTR and co-living is such that it is hard to draw a line between each sector. According to the British Property Federation, BTR tenants can expect a range of facilities, from lounges to gyms, that look very much like co-living. 

But not all BTR investments will necessarily fit this mould. For example, Citra Living, the Lloyds Bank venture that has attracted significant attention with speculation that there is a target of 50,000 homes within the next decade, which would make it much bigger than the current biggest institutional player Grainger, which has less than 10,000 homes. Citra looks much more like conventional private rental sector accommodation than co-living, although this may well evolve as the business grows. 

If BTR, and its sexier sister co-living, does indeed grow as big as ambitions indicate, then tighter regulation is surely heading its way. The entry of a blue-chip juggernaut like Lloyds at such an early stage of its evolution is both a blessing and a curse.  

The advent of shorter term lets will similarly see the sector stray significantly into the short-term accommodation space, just as some short-term accommodation players are already active in longer lets (Airbnb being perhaps the most prominent example). 

All this uncertainty means that expectations of yields dropping to the level of established regulated rentals is unlikely. But some tightening seems baked in. 

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