£2.25B Co-Living Spending Spree Is The ‘Final Frontier’ For Investors

Investors in the UK and Europe are betting that co-living yields will converge with those of build-to-rent and student accommodation, creating big value uplifts, and are set to put £2.25B into the sector over the next few years.

Co-living has had its problems in the UK in the past few years, including the administration of its biggest operator, The Collective. But it offers a way of investing in residential with less risk at lower value than similar sectors, and it is increasingly attracting investor interest, attendees at Bisnow’s Co-Living Big Bang event heard. 

“There is no reason why co-living assets should be trading at a wider yield than BTR and student accommodation,” Crosstree Real Estate partner Safinaz Zakaria said at the event, held at the Leonardo Royal Hotel London City, in partnership with developer and operator Re:shape. “It’s the final frontier in the living sector for investors.”

Zakaria said that co-living assets were selling for yields around 200 basis points higher than student accommodation and 250 basis points higher than BTR. But given the demand for co-living and the strong occupancy performance over the past few years, as institutional investors become more comfortable with the sector, yields for co-living should fall in line.

“If you believe in a yield of 4% for PBSA, there’s no reason why you shouldn’t for co-living,” she said. 

Crosstree has put its money where its mouth is, buying the 700-room Canary Wharf asset of The Collective (more on it later) out of administration as well as backing Re:shape in buying and converting a former hotel in Wembley into a 300-bed co-living scheme under the duo’s Ark brand. 

The sector also offers the kind of hedge against inflation that is supposed to be one of real estate’s raisons d’être.

“Co-living offers the highest yields in the living sector, but at a lower rent, about 15% on average below equivalent BTR rents,” Node founder and CEO Anil Khera said. “People can afford our schemes if they earn £40K a year. 

“There is also the inflation hedge for long-term investors. The average stay is one to two years, so you can mark the rents to market and increase them in line with inflation.”

These characteristics are increasingly appealing to investors, who are set to put an increased amount of money into the sector over the next five years, Savills Capital Advisors Director Sonia Wang said. The firm’s recent investor survey found that 50% of the European investors wanted to deploy more in the sector.

“Of those, 30% want to deploy between €100M and €500M, which means there is €2.6B to be deployed in the sector in the next few years,” she said.

The total size of the UK’s co-living sector, combining both operational beds and pipeline, has nearly tripled since 2019, Savills said. The number of beds completed and opened to residents more than doubled last year alone, with 2,000 new ones in operation. This has brought the total number of operational co-living beds in the UK to 3,422, with a further 21,599 in the pipeline.

There is little sign of oversupply, Re:shape co-founder Jermaine Browne said, with Savills data showing that only 4% of current demand was being met.

“BTR is not as affordable, and the removal of [government support scheme] Help to Buy means there is a perfect storm of housing delivery not coming through,” he said. 

If anything, many of those schemes with planning permission will be delayed because of the increase in construction costs, with inflation pushing up labour and materials prices, and the increased cost of debt, Zakaria said.

“A lot of those schemes were consented on a previous basis, and may not work in a world where construction costs are up 15%,” she said. “I’m not sure all of that pipeline will be delivered. That is good if you have existing assets, but may hold back those that want to grow their portfolio.”

While debt costs have gone up, lenders are still willing to provide loans in the sector, which was not a given considering it is an emerging asset class, Zakaria added. And the recent drop in energy prices had eased the pressure on operating margins — when prices spiked over the winter, the cost of energy for rooms, typically offered with bills included, was creating cost leakage of up to 20%. 

In 2021, The Collective, until then the earliest mover and biggest name in the UK co-living sector, went into administration. The collapse of the sector’s trailblazer created problems for those looking to expand, some which have been easier to surmount than others. 

“The first pioneer in the sector going into administration and the headlines that created haven’t helped,” DTZ Investors COLIV Investment Director Chris Saunders said. COLIV was a fund originally in partnership with The Collective. 

“We’ve had to spend a lot of time explaining to investors that it didn’t fail because of operational issues, or demand for co-living, it was because the business was overleveraged,” Saunders added. “Occupancy stayed high even during the pandemic.”

Saunders said that investors are overcoming any reservations they might have had in the wake of The Collective’s collapse, given strong demand for rooms and good returns on offer. A more difficult legacy is the associations the company created in the minds of planners. 

Rooms in The Collective’s first scheme at Old Oak Common were 130 SF, and planning officials from other boroughs that saw the rooms were wary about approving co-living schemes because the rooms seemed so small.

As a result, newer developments are favouring larger rooms to assuage these concerns: Saunders pointed to his fund’s scheme in Earlsfield, where rooms are 183 SF on average, and Node’s Khera said the company’s latest scheme in Brixton averaged 237 SF. 

“Innovators never get anything right first time, and real estate is not like tech, it’s an unforgiving sector, especially when you lose other people’s money,” Khera said. “But where the sector started, with small rooms and typically short stays — we’re moving on from that.”