The coliving sector has seen a significant surge in interest in recent years, appealing to tenants grappling with high barriers to homeownership and skyrocketing rents, and attracting investors and developers in an uncertain environment dominated by inflation, build costs and rising interest rates.
The trend
And it seems 2024 will see coliving continue to evolve and come even more to the forefront as more investors start to recognise the benefits. Following a survey of European investors with over €1 trillion of assets under management, Savills found that 38 per cent were already investing in coliving, with 51 per cent planning to invest within three years. In the UK alone, Savills notes £2.25 billion of investment is set to be deployed over the coming years.
“We are seeing substantially more demand over the last 12 months specifically for this asset class from a debt position and from an equity position,” Chris Theodosiou, partner, residential valuation at Allsop says, adding “We are seeing equity looking at unconditional sites with the planning potential for co-living, and we're seeing debt funders both happy to do the initial bridge funding and then also doing the development and even transitioning into a stabilized investment position as well.”
Further illustrating this interest is Extendam, who late last year teamed with Keys REIM and Stone Capital to sign an agreement with coliving operator Outsite, backing its European expansion plan with a €300 million commitment to secure new properties. Operators behind coliving units also include names such as APG, British Airways, BP Pension Fund, Co-Liv Fund (DTZIM), VITA, Blackrock and Oaktree, with these companies behind units at Living Scape, Dandi, Folk, Ark, The Collective, Union and Outpost.
Daniel Beck, founder & CEO of Coliving.com adds that there’s a huge demand for co-living, partly aided by the introduction of regulations which stifle the operation of Airbnbs in several cities, stating “Airbnb is losing in cities because of regulations, so more mid/long-term high-profile renting options are needed, such as co-living.”
Challenges
But while coliving seems to be garnering a lot of interest, supply is greatly outstripping demand, with only around 5000 beds of coliving accommodation currently operational in London - being where most coliving development is centred around – and the amount of total operational coliving beds in the UK amounting to just over 31,000. Meanwhile the core target market for coliving in the UK is currently estimated at about 725,000 people, signifying a huge untouched market. And rental demand for those coliving developments which have opened has been high especially in London, with Theodosiou also spotlighting cities including Manchester, Reading, Brighton and Leeds.
Turning to Europe, JLL’s head of EMEA Living Research Nick Whitten notes: “Currently there are around 56,000 operational coliving beds across Europe with a pipeline for a further 75,000 beds. This is a drop in the ocean when considered in the context that there are 65 million rental households across Europe.”
However, investors looking to take advantage in the UK in 2024 and beyond will need to take into consideration a planning system which hasn’t yet caught up with the concept, with the absence of a dedicated planning classification and the subsequent uncertainty negatively affecting development.
And this in turn, hurts the funding of coliving schemes.
Jo Winchester, coliving consultant at Gerald Eve says: “Because it's relatively new as an asset class and form of accommodation, a lot of lending offices perhaps haven't seen that many examples or they don't have internal guidance on how to treat it and are not quite sure on how to because it transcends planning use classes to some extent.”
Furthermore, the slow-moving planning system means securing approval for a scheme could take years. For this reason, many are increasingly exploring repurposing hotels for coliving use, with experts noting that hotels lend themselves well these conversions.
“Predominantly, typical hotel room sizes and layouts can cater quite well to coliving and so for repurposing, your actual conversion costs can be limited as much as possible. In some hotels with large conference facilities, those are now being converted to provide the residential amenity space,” Theodosiou says.
He adds: “With hotels, although nightly rates can be more lucrative than doing a longer length of stay, there are greater operational costs. Hotels can adapt relatively easily to cater to coliving requirements and in these instances, investors seek to create a lower management intense product and operation whilst also providing slightly longer term and more stable rental income. So we are seeing hotel owners and investors looking to diversify their portfolio slightly, where they're looking at coliving.”
Furthermore, Outsite’s strategy to target hotel properties with 20 to 50 keys or more in France, Spain, Portugal and Italy in its goal to reach over 3,500 keys within the next five years, suggests a trend towards converting existing hotel assets into coliving spaces.
Considerations
However, Winchester warns that not all hotels are suitable for conversions of this kind, and careful considerations need to be made.
She notes that while many hotel-type assets are being repositioned as coliving, with some hotel operators successfully implementing a hybrid model of a mixture of long and short stays, these need to be in locations which can support decent rents and where there are obvious demand drivers.
“Some hotel operators are definitely looking at offering a proportion of longer stays and even retrofitting some of their assets in order to offer longer stays. But it’s important to get good planning advice, take stock of the location and whether there would be demand in that location, and also enter into it with a careful management plan so that it is still operated within the style of a hotel but offering longer lets,” she says.
She adds: “With coliving, there is potential to add value by having longer term income rather than just short stay - 1, 2 or 3-night - style of income. Given the demand, it could be a good time to review hotel assets that could be suitable. But it won’t work for a tired, budget hotel. For the right asset, it could be a strategy to do more long term lets.”
Looking to the future
Looking ahead, Theodosiou forecasts continued demand from investors, developers and tenants, with Whitten noting that while co-living is still in its infancy, investors are showing great interest as it is set to play an increasingly important role in modern society for young professionals.
“There’s incredible demand on the rental side, especially at the rental levels being asked which are premiums in the rental market for studios. I also see continued growth from a planning consent side as there is further clarity on that front,” Theodosiou says.
Winchester adds that she expects the coliving revolution to be aided by a reduction in interest rates over the next couple of years, a development she says will alleviate the challenges faced by the co-living sector.
“The cost of finance is one blockage to deals happening and progressing. And I think as there are more examples that have schemes that are actually finished and come to the market and let up, that will massively help in terms of planning and funding.”