MAGAZINE: ‘Micro living is becoming an asset class in its own right’

Temporary furnished accommodation is growing in importance, a preview of a workshop document to be shown to investors by Corestate Capital reveals.

Micro living is one of those industry buzz terms used with alacrity in Europe. However, how well understood is the term as a property concept? For one European firm, ‘not well enough’ is the answer, which is why it has produced a ‘workshop document’ to help educate institutional investors.

Corestate Capital Group, a European real estate investment manager, gave PropertyEU a sneak preview of its document ahead of sharing it more widely with clients as the basis of discussion with institutions that might want to participate in this segment of the real estate market.

‘What we have endeavoured to do is define micro living,’ says Douglas Edwards, Corestate’s head of group equity raising and client services. ‘For us, it was a sub segment of the residential sector, but it is now being defined and created as an asset class on its own account.’ He further explains: ‘Micro living is the extension of residential property into the temporary sector based initially on age group which has widened.’

Originally, micro living was synonymous with student accommodation, underlined by rising transaction volumes mainly in the UK and Germany. But now, student accommodation can be seen as a sub-sector of micro living. Student accommodation operators recognised that people other than students were using their short-term furnished accommodation in the UK and in key Continental Europe target markets.

Indeed, Corestate discovered that 35% of occupiers of its student digs portfolio were not students at all, and therefore realised it needed to offer something separate for these non-student groups. Corestate’s co-founder and chief investment officer Thomas Landschreiber saw this eight years ago, says Edwards. In response to prevailing market trends, demographics and the labour market, the group branched out from student accommodation to provide business people with small furnished residential units for a short period of time.

Corestate calls the business user group ‘commercial clients’. This is why the firm has expanded the definition of micro living to ‘residential and commercial developments comprising small, fully-furnished residential units’ targeting almost exclusively single people. Typically, micro units measure between 20 and 24 m2 even for business and serviced apartments not including communal quarters, its report adds.

Target residents
Target clients of micro living companies encompass young professionals, project employees and expatriates as well as long-distance commuters. These groups share the need for accommodation for a limited period of time and typically require less space than they would for longer term living, but they still require furnishings.

Corestate has created separate brands, concepts and operational platforms to cater to these differing brackets of co living and co working clients. The different micro living concepts have been broken down by Corestate in its workshop document (see chart). For example, in student accommodation one typically finds it being furnished including a kitchenette, plus learning areas, TV, washing lounges and a gym, with the presence of a house manager. Stays are typically over one year and are not capped.

Micro apartments for business people have the same as facilities as for students but there is no need for the learning lounges or an onsite house manager. Stays for micro apartments used by business people are typically for at least three months and remain uncapped. Serviced apartments are the third concept. These differ because the length of stay is for anything over one day but capped at 6 or 12 months. They typically have housekeeping services, a business centre, TV lounge, plus a food and beverage area. Clearly the yield and rent increase the shorter the stay for these models.

Demographics and mega trends
Demographic analysis suggests that Generation X – those people born between 1965 and 1980 – are using micro apartments and are pushing Millennials on that front. This is because Generation X comprises people that are energetic, busy and on-the-move. The next generation is following in their footsteps; mega trends such as work flexibility, urbanisation and ‘community culture’ are being super imposed upon demographic factors to further segment micro living. It all adds up to a long-term feature of the real estate market that simply cannot be blown away by shorter term blips in a country’s GDP for example.

‘This is not a fad,’ says Edwards. ‘Short-term risk can be mitigated because these are not short-term trends, these are fundamental shifts. It is not just the German or UK markets, but a phenomenon across mature markets of Northern Europe and elsewhere such as in Sothern Europe.’

Of course, the same drivers for micro living are seen in the US and Asia, so it is not a European trend either. Nevertheless, there is a general rippling out from the mainstay UK and German markets to other countries in Europe. Micro living has not been embraced at the same pace everywhere, it seems. ‘Micro living has a clear need to grow from the core urban areas in a ripple effect,’ observes Corestate’s head of equity raising.

The company has 26,000 units across Europe, and feels liquidity is increasing for micro living assets. And micro living is not just for the young either. Among the aging population, people still want independence plus an environment where they can enjoy a quality of service. Assures Edwards: ‘We see a continuum and strata of operational platforms in the aging space.’

The approach underlines a much bigger trend across the real estate industry. Firms like Corestate are getting to grips with micro living as they see themselves as ‘space managers’ rather than asset owners. ‘If you look at this, it has sustainable long-term value, cash-on-cash returns equal, if not better, than traditional residential property, but you need to manage it well,’ Edwards points out.

The amount of space that clients want and how they use space is being looked at closely by Corestate’s operational platform. It goes to the heart of the well-being movement seen in offices and now being witnessed at logistics properties that employ significant numbers of people. ‘We are showing our tenants we are aware of their needs, not just what we can offer them.’

 

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