Despite initially emerging in scale in 2016 with the opening of The Collective Old Oak, more than six years on, the co-living market remains in relative infancy. While the fluctuating macroeconomic environment and COVID-19 pandemic have clearly slowed this sector's progress, the ever-maturing build-to-rent (BTR) and purpose-built student accommodation (PBSA) markets have not experienced the same stifled growth.
Hurdles
Land & Planning
Regardless of the ongoing economic challenges, the land market, particularly in London, remains incredibly competitive due to a lack of supply and an abundance of existing and new entrants in the market. If a site is secured, the next and potentially largest hurdle relates to planning, where challenges abound and become exacerbated through delays, uncertainty, and significant cost.
Defined planning barriers and rigid use classes at national level, conflict with nuanced policy and the political stance at local government level. This is evident across London where strict and prescriptive emerging policy from the Greater London Authority (GLA), conflicts with the appetite of Local Authorities, some of whom appear to regularly change their stance depending on local politics. This confusion and conflict leads to a protracted, expensive, and time-consuming process, putting off developers and investors alike.
Operational Experience & Funding
Our key takeaway from earlier co-living products is the misalignment of costly amenity space, between what is provided and how much is used. Previous schemes have looked to place greater emphasis on community engagement, including extensive staffing, overlooking the role of co-living as an affordable alternative, and hampering operational performance. This operational efficiency is further hampered by rigid and extensive planning guidance, such as the GLA requirement to have a certain number of kitchens per person (0.6 sq m per person). There is a push for a kitchen on each floor, regardless of the number of beds—again, this is prescriptive and perhaps unrealistic. Developers need to be aware of the impact on gross to net areas and operational costs, which, once proven, will increase institutional investment in this space.
Opportunities
Tenant Demand
From the limited evidence available to date, there appears to be strong tenant demand across operational assets. The two FOLK schemes (Harrow and Earlsfield) have received strong interest to date, clearly demonstrating demand. Living by Scape, in Guildford, which houses 113 beds, was fully let within 7 weeks with an average tenancy length of 11 months. Once refined, why should this sector not perform similarly to BTR?
With an increasing focus on affordability and certainty over future expenditure, operators are finding the all-inclusive nature of their tenancies popular with tenants, as they can be sure of their monthly outgoings while maintaining a good lifestyle in a desirable micro-location. Based on an average bill of £336 for a one-bedroom flat, we calculate a 15% savings in a co-living apartment versus PRS + bills.
Investor Appetite
More confident, adventurous capital is seeing the opportunity to benefit from early-mover advantage, the current weak pound and the ongoing affordability crisis facing private rents and first-time buyers.
That said, the lack of operational comfort that can be provided to incoming funders and the ever-changing goalposts of policy makers is causing uncertainty and delays in the progress of co-living into a more institutional grade asset class. As a result, we are finding that the development markets approach often remains ‘subject to finding an institutional funding partner’, prior to committing to purchasing or delivering a site.
The Future of Co-Living
If we look to the future, the city of 2040 will offer households a greater choice, with a diverse range of living products to suit everyone’s needs. Higher rates of urbanisation and population mobility could see co-living schemes assist younger generations who want to live in cities leave the nest the nest by offering lower rents than BTR. The desire for different types of rental product could see co-living spaces integrated with BTR schemes, rather than standalone assets, thus reducing risk to investors and operators. There is still a considerable amount work to be done, and it will necessitate seismic alterations in the planning system. Co-living has the potential to accommodate change in a post-pandemic world.
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Ultimately, co-living development and investment is still at the beginning of the journey, offering clear first mover advantage. While being referred to as ‘student accommodation for young professionals’, we are seeing funders view it more closely with BTR. There is increasing traction with the capital markets to invest in what they see as a sub-sector of the BTR market with significant synergies. Few Developers, Investors or Consultancies can point to a track record in this space. However, opportunities lie within the market and Cushman & Wakefield has been heavily involved in a major co-living land transaction in Wandsworth and is currently advising several landowners on an investment and land basis.
If you are interested in exploring more opportunities in the co-living sector or for more information on the current market, please get in touch with Jim Cooper on +44 (0) 7393 736 535 or jim.cooper@cushwake.com.
