Co-Living And The Future Of The Residential Rental Market
The traditional rental market is flawed. Luckily, things are changing. Here I talk about the rise of the serviced rental market, specifically the co-living sector. It is what occupiers want and need. The more we build and innovate, the more likely we are to succeed.
Co-Living And The Future Of The Residential Rental Market
Renting an apartment is no fun. Properties come and go instantly whilst bidding wars & queues to view properties are common. Once a deposit has been signed it is followed by months of paperwork and negotiations. And once contracts are exchanged, painful months of furniture, wi-fi, bills and tax arrangements. Frustrating for occupiers, yet ideal for landlords. With high demand and low supply, rental and land values keep on rising. As long as this is the case, landlords have no reason to adapt. Hopefully, this will not be the case for much longer. Economic dynamics are changing, planning laws are being loosened, new players are entering the market, whilst underutilised buildings are being upgraded and repurposed.
One new player entering the market is the serviced/managed apartment solution. It significantly eases the renting process, offering fast & online transactions, all-inclusive rents, flexible lease terms, furniture & wi-fi ready to go. They are filling a gap in the market and creating a shift in an industry often known to be archaic. I believe this shift will only accelerate as this is what occupiers want and need. These serviced solutions include co-living, apart-hotels, long stay Airbnbs, and all-in-one living arrangements. They are often tech-savvy and ensure the customer is the priority. They facilitate the living experience and ensure occupiers have nothing to worry about. The serviced solutions come in different forms but what they all have in common is an upgrade to the traditional rental market.
Now, looking at the co-living sector in more detail, a sector which has received much attention of late. It is no new concept although new in its form in the 21st century. As quoted in this Invesco Real Estate paper:
Despite the buzz-worthy nature of its nomenclature, co-living is not a new trend, but merely the re-envisioning of an old one. A living environment whereby tenants share resources and space in exchange for lower costs and cultural commonalities harkens back to sociallyminded communes of the 1960’s, and further still to the boarding houses of the 19th Century. Put more succinctly, co-living in the modern era has been defined as purpose-built and managed developments that include a combination of personal and shared amenity space.
Co-living offers that little bit more than other managed solutions through its shared amenities and community lifestyle. Unique with the apartments is that they are smaller than the average, which is compensated by communal space for co-working, libraries, roof terraces, gyms and pools.
Loneliness and mental health are further reasons why co-living is appealing. Especially for young professionals living and working away from their families. Additionally, they are able to move in without any hassle of traditional renting and can focus on their professional and social lives. With all of its offerings, co-living apartments do not necessarily need to be located in city centres, but they do need to be close to transport links into city centres.
Another big benefit is cost. Not only is traditional renting time-consuming, it is expensive. This Savills report suggests that co-living offers a 20% discount versus the all-in cost of living in traditional rental accommodation.
The financial benefits are not only for occupiers but so too for investors. Reports from Equity Multiple and JLL suggest that co-living operators achieve significantly higher rental income (30% premium) and NOI (40% returns) than similar sized properties. As a result of the shared amenities, developers can create bedrooms with less space for individual kitchens, bathrooms, and living rooms.
With its many benefits, co-living does have its negatives. Customer service is often an issue. Everything is done online and if a problem arises it is difficult to get it rectified. Stories have come out where tenants have received unexpected letters of abrupt lease terminations. Many would argue they still prefer traditional renting which offers them privacy. Evidently, the market still has a way to go.
Writing this article, I have realised that the residential market needs to transform in the same way the office market has. I doubt it will follow the same path, but the office shift should at least give us an indication. One development I will be keeping a close eye on is Flow, Wework’s founder Adam Neuman’s new venture. He is hoping to revolutionise the residential market in the same he did with the office market. If anyone can do it, it’s Adam. Whether he is able to build a financially viable business is another question.
Another idea is converting underperforming hotels to co-living spaces. In essence two very similar concepts, one being short-term and the other being long-term.
Final thoughts
Serviced apartments and co-living are what occupiers want and need. The more we build and the more innovative, the more likely we are to succeed. For that, not only do we need to build more, we need to upgrade existing stock and repurpose underutilised space. We need the same shift to happen with residential as it has with offices, innovate or die.
A couple of thoughts from the past month:
I struggle to believe we will go ahead with banning lettings of buildings with EPCs of F and G from 2023. This Savills report suggests that 185 million sq ft of retail space will be unlettable from next year. No chance in my opinion. I’ve previously discussed this here.
The ‘’mini-budget’’ has done no good to the UK real estate sector (so far). Deals have been put on hold whilst many have been renegotiated.
A great read about the misconceptions about the environment and sustainability. The article talks about the problem of what is ‘good’ for the environment often not lining up with our intuitions.