Rise of short-term living brings profits and plethora of terms

Co-living is touted as a silver bullet for social pressures, but is the rising star of residential in need of a reality check?

New co-living concepts are mushrooming and players are expanding, leading to a divergent picture in this sub-sector of short-term living space.

There is a real buzz about this branch of short-term living right now, with figures showing it is enjoying a major growth spurt. Across Europe, there are around 25,000 co-living beds and its rapid rise is forecast to continue. Some 60% of all co-living schemes across Europe have become operational since 2017, accelerating fastest in the last two years, according to JLL.

Meanwhile, the pipeline is huge, comprising 72% of the total segment, which is due to complete by 2022, the services firm found.

Major investors in Europe include The Collective, which recently developed and launched the biggest co-living space in the world in Canary Wharf, London, numbering around 700 units. It recently acquired four projects in Germany and is focusing its efforts in that country, this year.

Then there is the ambitious Corestate Capital and Medici Living Group joint venture, Quarters. The firms are investing €1 bn of equity and debt in co-living over the next five years, targeting investments of €20 mln-€60 mln.

Quarters is expected to amass a portfolio of around 35 assets and up to 6,000 units in Austria, Switzerland, Spain and Poland, as well as the current leading co-living hotspots of the UK and the Netherlands.

Living in reality?
Reality check time: research by housing think tank, Class of 2020, shows co-living trails other residential sub-classes by some distance.

It forecasts €12 bn going into purpose-built student accommodation. Meanwhile, so-called hybrid models - which blend co-living with another segment – such as The Student Hotel in the Netherlands and Room2 – which styles itself as a ‘hometel’ - in the UK, will see €9 bn. Lagging behind is co-living, on around €4 bn.

Nonetheless, the segment stands at a ‘tipping point’ according to Knight Frank, and the buzz is at a high pitch.

Institutional investors are piling in. Leading the charge is DTZ Investors, the specialist European fund manager. It has recently launched the world’s first institutional co-living fund, named COLIV with a €758 mln cap, in partnership with one of Europe’s leading developers and operators in the segment, The Collective.

COLIV is targeting up to 10 acquisitions in the UK, over the course of this year and beyond.
Elsewhere, Germany’s Patrizia has its new pan-European, open-ended residential fund Living Cities, which is targeting a 20% allocation to alternatives including co-living in 12 cities. AXA Investment Managers - Real Assets will begin targeting co-living via its European residential fund, from Q2 this year.

‘The size of the sector may not sound like much at first, relative to other residential segments,’ admits Sebastian Dietert, Living Cities Fund Manager at Patrizia.

‘But what’s clear is the speed at which this new sector has grown in the last two years, means it is already an established part of the living market.

‘What we have observed so far is that our investors who have bought into our Living Cities fund are very excited about co-living as a residential segment with strong growth potential.’

Growth drivers
So, what is driving the growth? Behind co-living’s rise to prominence are big macro shifts in the way people live and work in big cities, say experts.

Affordable housing is in short supply, making it difficult for first-time buyers in particular to get on to the housing ladder. In addition, more and more people are migrating for work to cities – which generate up to 80% of GDP, and short-term contracts are the new normal for many millennial workers.

In short, modern life no longer proceeds in neat and tidy 12-month cycles. Short-term living is the property sector’s response to these social mega-trends.
Indeed, it is easy to find developers and operators who describe co-living as if it is a cure for modern problems.

Worried about the housing shortage gripping urban centres? Co-living uses less space per unit than traditional residential models, acolytes say.
Concerned that real estate is bad for the environment? Well, some co-living developers boast they use sustainable building materials, while operators brag about offering residents an organic-only food menu.

Does the urban loneliness problem make you sad? Co-living’s marketing depicts young people having fun together in their residence’s social area. Here is where city dwellers live who aren’t lonely, purr the adverts.

Typically, the amount of private space in a co-living unit is between 22 m2 to 30 m2, with a bedroom and kitchenette. The heart of co-living’s offer to young professionals with urban alienation, is the large social areas and the hospitality-levels of focus put into creating opportunities for face-to-face interaction. Events can include film nights, screen writing workshops and cookery classes.

‘We crave connection in lots of areas of life but we’re not finding it,’ says Basil Demeroutis, founder of the FORE Partnership.

Headquartered in the UK with an office in Frankfurt, Germany, the FORE Partnership seeks out and converts under-valued properties in the UK and Germany, reshaping them into co-living spaces. Its portfolio currently comprises 12 assets with a market value of €366 mln.

‘We used to have it in social and religious communities, but today we have to create new ways for people to have that sense of community, says Demeroutis.

‘We’ve tried to find it in social networks online, but these things are less authentic, and we are social animals.’

Beyond co-living’s almost missionary zeal lie sound business fundamentals. The residential market is significantly larger than the office market, and demand is surging due to an acute lack of supply in the segment’s hotspots.

Indeed, operators’ expectations have evolved, as the nature of occupier demand has manifested itself.

‘I think we make more money, not less. There is not a trade-off. We are 100% profit-peaking and maximising,’ says Demeroutis.

‘When we first looked at co-living, people thought it would solve the housing affordability crisis in Europe. That you could attract young people by taking the “pie” of a building, chopping it into smaller slices [units] and making it more affordable.

‘But it’s deeper now. The sector has found that people are willing to pay the same or even more for a co-living unit, if it has a community dimension to it. It’s an affordable way to live in a thriving city which fits in with people’s work and lifestyles.’

Recent notable investment deals include AXA IM - Real Assets buying French co-living and student housing operator, Groupe Kley, from Oaktree Capital Management. Kley’s portfolio comprises around 2,500 beds across seven operational residences, plus a secured pipeline of around 3,300 beds in university towns in France.

Meanwhile, PropertyEU understands the grand Fulham Town Hall in west London is to become a co-living residence, with Room2 acquiring the Victorian grade II listed building.

A perplexing soup
One challenge co-living faces is that there seems to be as many definitions as there are developers and investors. Co-living’s nomenclature is currently an alphabet soup of terms, leading to a lack of clarity. Not even the experts agree.

‘Whenever I give a presentation on co-living, my first slide is my personal definition of co-living. Then I ask everyone what their definition of co-living is and I get a different response almost every time,’ says Joe Persechino, head of residential and student accommodation at AXA IMRA.

Patrizia, the German investor, classifies co-living as a sub-category of micro-living, alongside compact living – self-contained homes – and shared living – which is broadly student accommodation.

In contrast, Yoony Kim of Class of 2020 group sees co-living and micro-living as totally distinct. ‘Co-living is a shared living concept offered as a service to accommodate a group of people by a for-profit company,’ she says.

‘Co-living spaces often feature compact single or shared bedrooms, multi-purpose communal spaces and have a strong emphasis on community building through facilitated programming. It's part of the co-revolution triggered by modern lifestyle shifts, urban housing issues and the sharing economy.’

Regulation can impede clarity, too. In Germany, building rules class co-living as standard residential, meaning the small private space that is a feature of co-living, makes it ‘micro.’ But in Italy, a co-living scheme may get consent as a hotel. Meanwhile, in the UK the developer and operator Room2 calls itself a ‘hometel’. In the Netherlands there is the high-profile Student Hotel.

A plethora of operators from industries as diverse as hospitality and student accommodation have their own take and add their own twist, depending on whether their background is in hospitality or purpose-built student housing.

Regional differences
The subsector really depends on the city; co-living in Germany is different from that in France, which is different from Spain, which is different again from the UK.

Niels Berl is investment director for Germany at The Collective. Based in Berlin, he predicts the segment is ripe for a tidy-up. Perhaps 2020 will see the market mature.

‘I think there will be a sort of clean-up of the market in Germany to some extent taking place this year. There have been a lot of real estate developers who are riding the wave and they have these assets which aren’t thought through from the operational perspective. They are similar to “mom and pop” co-living operators.

There may be an opportunity for market consolidation this year.’

Keeping up with all the buzzwords for co-living is hard work but identifying hot spots in Europe is easy because co-living is a highly urban trend.

In total, only eight cities host nearly three-quarters of the total operational supply, according to JLL. London has the biggest co-living segment, comprising 22% of the total market in Europe. Amsterdam, the Dutch capital, is second-largest with 18%. In a distant third place in Paris.

Together, London and Amsterdam account for nearly 40% of the European market. Interestingly, Berlin - which is known for its large and entrenched private rental sector – has less than 5% of the co-living market.

What calculations are developers and operators in co-living making when deciding whether to launch an asset?

Location is crucial, as always in real estate. Quarters does not operate in cities with less than 500,000 inhabitants. The segment is making in-roads in urban centres with a high ratio of housing costs to income, according to JLL.

Other considerations include how the project fits in with a city’s social living requirements, what percentage of a new development co-living should comprise, what level of hospitality-style operational management is appropriate and what the median income profile of a typical tenant should be. In locations with high land and construction costs, does it make sense to mask high prices with extra services?

Short-term living in general, and co-living in particular, is a product of life in 2020.

‘There is growing demand for a type of affordable urban accommodation that offers residents a perfect mix of community and a sense of wellness, balancing their busy work lives with a healthy active lifestyle,’ says Dietert of Patrizia.

‘In the digital age, more and more younger people complain of a feeling of isolation and are looking for a sense of community which co-living offers them. While we do not offer our own growth forecasts for co-living, we are confident that socio-economic trends such as urbanisation, ageing populations, a growing demand for flexible working and work/life balance, are here to stay.’

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