The rise and fall of The Collective
In the decade following its launch, The Collective grew into the world’s largest co-living developer, with a portfolio of almost 9,000 beds and plans to increase this to 100,000 by 2025.
Reza Merchant, its charismatic and idealistic frontman and founder (pictured), defied critics, shrugged off WeWork comparisons and forged ties with local authorities, global investors and even the mayor of London and Greater London Authority. The goal was nothing less than establishing a new asset class in the UK and, later, internationally.
But the pandemic hit the business hard, and last week The Collective collapsed into administration after struggling with lost income, development delays and, finally, a failure to secure a sale of the company.
In the decade following its launch, The Collective grew into the world’s largest co-living developer, with a portfolio of almost 9,000 beds and plans to increase this to 100,000 by 2025.
Reza Merchant, its charismatic and idealistic frontman and founder (pictured), defied critics, shrugged off WeWork comparisons and forged ties with local authorities, global investors and even the mayor of London and Greater London Authority. The goal was nothing less than establishing a new asset class in the UK and, later, internationally.
But the pandemic hit the business hard, and last week The Collective collapsed into administration after struggling with lost income, development delays and, finally, a failure to secure a sale of the company.
The downfall of The Collective now threatens the co-living sector, just as investors were taking note.
Administrators take control
Matthew Boyd Callaghan, Andrew Johnson and Lisa Rickelton from FTI Consulting have been appointed joint administrators to parent company The Collective (Living) Group and operating company The Collective (Living).
The companies own two operational co-living schemes in the UK at Old Oak and Canary Wharf, and an apart-hotel in New York. The Collective also has a further four sites currently under construction and 13 in pre-development in the UK, Ireland, Germany and the US. Overall, the developer has 1,623 beds in operation and a further 6,590 in the pipeline.
The Collective has secured an agreement with key stakeholders at the two UK sites to continue operating as usual. All assets outside the UK, which are held in separate entities, remain under the control of their directors and do not form part of the administration.
Recent development has been funded by the Coliv fund from DTZ Investors, which aims to deploy £1bn on between six and 10 projects in London over 10 years. DTZi owns 800 beds across three schemes under construction in Harrow, HA3, Earlsfield, SW18, and Battersea, SW11. The Coliv fund website is currently under maintenance, though it is thought that DTZi will continue these projects and will source a different operator. The rest of its residential portfolio is currently managed by Urbanbubble.
The Collective has continued to expand with developments in Waltham Forest and Hayes. The latter saw plans lodged just last month for a 376-bed scheme. Administrators say they will work on transitioning functions and operations and assessing options for the company.
[caption id="attachment_979049" align="aligncenter" width="847"] The Collective’s Canary Wharf location[/caption]
“Collective living”
Merchant founded The Collective in 2012. He leveraged a £1.8m bridging loan against his family home to fund the refurbishment of an 11,500 sq ft derelict mansion block in Camden, NW1. The Collective opened its first purpose-built development in Old Oak in 2016, and the building quickly became a blueprint for other developers across the country.
Developments grew from offering 120 sq ft studios with basic shared space for £500 a month to larger purpose-built developments with short-stay and long-stay options, iconic amenities including rooftop swimming pools and £2,000-a-month rents.
“People often refer to co-living as ‘Collective’ living,” Merchant told EG in December 2019. “The product evolved as we did. It’s that bottom-up approach and the fact that we are the consumer that makes us unique. We are not just a soulless corporate that thought co-living was a great idea. We did it before co-living even existed as a word.”
At the time, Merchant had no concerns about the 100,000-bed target, instead stressing the huge demand for city living: “We’ll probably sit here in five years and add another zero on that.” He added that “bricks and mortar” was an important part of the business. “The fact that we own real estate, rather than just leasing it, solidifies and further reiterates that our model is much more sustainable.”
The Collective’s model, focusing on London, differed from new entrants that sought to expand in student hotspots in the regions, and the asset-lite approach of established operators in the US.
In February 2020, The Collective secured a £140m financing package from Deutsche Bank (£87m) and GCP Asset Backed Income Fund (£53m). The developer aimed to use the four-year loan to finance global expansion. The following month the country went into lockdown, construction sites were cleared and investment was challenged with the onset of the pandemic.
Mounting debt and a failed sale
The Collective is yet to file annual results for the year ended March 2020. However, an addendum to the 2019 filing made public in November 2020 highlights problems for the developer caused by Covid-19.
The company said a fall in income from operational assets owing to reduced occupancy and development delays had caused it to re-evaluate its cost base and take steps to reduce ongoing overhead levels.
In order to continue trading the company was reliant on financial support from parent company The Collective Group, which was in the process of raising capital. It said this indicated a material uncertainty casting doubt on its ability to continue as a going concern.
At the end of 2019, The Collective reported an £11.1m pre-tax loss. Company results show the group owed £42.2m to creditors and £22.1m to debtors, to be paid within one year. During the year, The Collective agreed a £500,000 loan at an interest rate of 8%, maturing in October 2020, and a further £500,000 at an interest rate of 18% maturing in January 2020.
Earlier this year Credit Suisse was appointed to sell the company. While a number of funds, build-to-rent developers and hotels groups were understood to have circled the acquisition, an agreement could not be met. Prospective buyers noted the complexity in the short-stay hotel consents and the large number of employees, with 126 at the end of 2019.
In May, The Collective made several major changes to its leadership, in a bid to focus on development of consented schemes. Merchant moved to chairman, former executive director James Penfold left the business and US-based Simon Koster was appointed chief executive.
The operating company currently has 62 employees. Administrators confirmed that while there will be no immediate redundancies, they will be likely in the coming weeks.
[caption id="attachment_1083290" align="aligncenter" width="847"] The Collective’s Westbourne Park plans. Photo by The Collective/AHMM[/caption]
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