Expansion, Debt And Breakup: Inside The Collapse Of The Collective

The Collective, the co-living company with ambitions to build a 100,000-unit portfolio, is in line to be broken up by its lenders after falling into administration because it could not meet its liabilities.

The London-based company with a transatlantic portfolio collapsed into the UK equivalent of Chapter 11 bankruptcy last week when reduced occupancy caused it to fall short of the income needed to meet debt it took on to fuel a rapid expansion just before the coronavirus pandemic.  

Now lenders to the company are likely to sell off a big chunk of The Collective's London and New York assets piecemeal as they take control of part of its portfolio in the coming weeks.

It is one of the largest real estate companies in the UK to go to the wall since the onset of Covid-19, and its administration marks a dramatic downturn for the organisation that pioneered the co-living concept and hoped to take it mainstream.

Administrators from FTI Consulting were appointed to the company last week after an attempt by Credit Suisse to sell the company over the summer did not produce a bid high enough to see a deal completed. 

Before its administration, the company was a genuine case of a real estate firm that grew into significance from tiny beginnings. At just 21, founder Reza Merchant set up the company as a brokerage for students looking for nicer shared apartments than the usual grotty fare served up in the private rental market.

From that beginning, the company started buying its own small properties of four or six bedrooms, adding nice furniture and welcoming communal areas. That segued into buying a derelict hostel in Camden, north London, and creating a 50-bed co-living scheme.

Then came larger, purpose-built schemes.

So what does the company own now, and how are those assets affected by the administration process? As is often the case with companies in bankruptcy proceedings, it’s complicated.

The Collective opened its first purpose-built co-living building at Old Oak Common in north London in 2016 and, in late 2019, opened its second London outpost in Canary Wharf in the east. At 546 rooms and 705 rooms, respectively, they are the two largest purpose-built co-living schemes in the world. 

In the U.S., it has one operational scheme, The Paper Factory in Long Island City, New York, which focuses more on short stays and has 224 rooms. 

Its development pipeline comprises seven further schemes in London, one in Dublin and five in the U.S. — three in Brooklyn, one in Chicago and one in Miami. When built out, the portfolio would have totalled 9,000 rooms, with an estimated gross development value of $3.6B. At the start of 2020, the company said it wanted to have a portfolio of 100,000 units by 2030. 

The administration only affects assets in the UK, the administrators that have taken over the company said, with the U.S. assets owned by separate entities and still controlled by their directors. In other words, it is essentially the management company of The Collective that has gone into administration and that company owns some, but not all, of its property assets. 

The two operational UK assets at Old Oak Common and Canary Wharf are still open and accepting guests and bookings, administrators said. Their lenders have agreed to provide a funding line keeping them operational and managed by The Collective staff.

The last set of accounts for the management company, The Collective (Living), highlight how badly the company was hit by the impact of the pandemic. The accounts, filed in November, state there was a material uncertainty about the company’s ability to continue as a going concern. Because occupancy had dropped, so had the fee income the company received, leaving it obliged to raise extra funding to pay interest on its loans.

“It has been a difficult time, especially the first few months when there was a lot of uncertainty exacerbated by the fact that we were all in lockdown,” Merchant told Bisnow last December. “But I think the sector has shown its resilience. From when we’re born to when we die, we want connection. It’s in our nature to want to be around other people and to be part of something bigger than ourselves. Even in a pandemic, there has been demand for our spaces.”

The main loan to the company was a £140M debt facility provided in February 2020 — just a month before the UK and U.S. went into lockdown — by Deutsche Bank and GCP Asset-Backed Income Fund, a specialist real estate lender listed on the stock exchange. 

The loan partly refinanced an earlier debt facility secured against the Old Oak Common scheme, and it was used by the company’s management to buy majority control of the building from its Singaporean equity backers for £125M in 2018.

But it was also a "discretionary" facility that the company could use to buy more sites and expand. Of the loan, £87M was provided by Deutsche Bank and £53M by GCP. 

The fact that GCP is listed gives a certain element of transparency to plans for the portfolio, and shows that, even though the non-UK assets are not part of the current bankruptcy process, lenders are still looking to take control of at least one of them. 

GCP said in a statement that lenders to The Collective had teamed up with an unnamed operator to put together an acquisition vehicle to "credit bid" for six of the company’s assets — essentially take them over unless it finds a buyer willing to pay a higher price than the debt secured against the portfolio. 

GCP said the operator is managed by a team that has developed and operated in excess of 25,000 student accommodation and co-living beds, and that the team would continue to manage the portfolio, with the assets sold off one by one so the debt is repaid. 

It did not name the assets but said five are in London and one in New York. It said that three are operational and three are developments, with The Collective’s only three operational assets being Old Oak Common, Canary Wharf and the Paper Factory in Long Island City.

The plan is expected to be finalised in the coming weeks, GCP said, signalling the beginning of the breakup of a company that once had the grandest of plans for a sector that was badly hit by its first recession.