Collaboration is key to unlocking scale in co-living

COMMENT The past 12 months have been tumultuous for European real estate. Rising interest rates and escalating energy costs have resulted in ongoing uncertainty in all sectors, and the residential market in the UK has not been spared. There is a chronic shortage of housing, particularly affordable, and rising mortgage and rental costs have persisted. As cities struggle to provide sufficient and appropriate homes for a rapidly growing urban population, co-living can offer a powerful opportunity for tailored community-centred living, catering to a wide demographic of renters. Just last year, the winner of the Davidson Prize – an award recognising architectural ideas addressing issues in housing – was a model for co-living in the countryside in the UK. This is testament to the product’s potential, versatility and ability to respond to a wealth of social, environmental and economic issues. Price discovery To overcome the barriers to co-living’s expansion and offer suitable homes to people renting across Europe, planners, developers, investors and operators must work together. Our recent European Co-living Best Practice Guide in partnership with JLL encourages key players in the sector to follow best practice in finance and investment in co-living as one way to support its expansion. Co-living transaction activity has been particularly focused on the UK (€600m [£534m] to date) and France (€500m), but is increasingly spreading to Germany, the Netherlands and Spain as the concept evolves locally. However, the co-living sector is still largely in price discovery mode, and the transparency of deal level information is somewhat limited. Given the increasing investor interest in the co-living sector and desirability of the product, what does best practice look like in financing projects? There are different ways to invest in co-living: co-living real estate (propco); co-living operator (opco); and co-living wholeco, each bringing opportunities as well as difficulties. The opportunity for propcos lies in owning the real estate, which allows potential capital value growth and gains from yield shifts. On the other hand, opcos’ opportunity is the lower initial expenditure required as solely an operator of the asset and its ability to focus on the resident experience. Successful investment in co-living projects could also be achieved through the wholeco – where there is alignment between the investor and the operator of the asset. Thorough due diligence on operator strategies and alignment of goals can reduce the risk of co-living assets not performing as predicted or forecast, impacting returns. The challenge here is getting access to the expertise in integrating both investment and operations to deliver and manage co-living assets. From a lender’s perspective, discovering where pricing margins should sit and ensuring viability of the product is critical for the decision to lend against co-living. This has been difficult for lenders to determine, due to the sector’s nascency and shortage of schemes that have gone through full development and are now stabilised. Debt is needed and increasingly becoming available for forward-funding packages, purchase of existing co-living assets, funding the repurposing of a different asset type into co-living, bridging assets while schemes are going through planning and funding develop-to-hold strategies. Stock sustainability Whatever the investment strategy and lending process, more co-living financing can be unlocked if market players increase transparency of co-living’s financial metrics and operational performance. Collaboration between investors and co-living operators to develop appropriate management concepts and build suitable assets will also help attract more financing. Co-living is a creative, sustainable and community-focused housing solution. The existing housing stock in many cities is often not tailored to a growing number of young professionals or single households, and generally does little to address the social challenges that they face related to loneliness and an absence of a strong network when moving to a new city. That’s why it is important for market players to back and sustain co-living. Unlocking investment and finance of co-living will be critical to sustain its expansion in Europe, and increasing collaboration between market players has a big role to play. Sophie Chick is vice president, research and advisory services at ULI Europe