Marcus Emadi | Director at Turning Point Capital
CONTENTS
Challenges
Land & Planning
Despite the ongoing economic uncertainties, the land market, particularly in London, remains fiercely competitive due to limited supply and the presence of numerous existing and new market entrants. Once a site is secured, the next major hurdle is navigating the planning process. This is where delays, uncertainty, and rising costs can prove significant.
National planning barriers and rigid use classes often clash with local policy nuances and political stances. This is particularly apparent across London, where emerging policies from the Greater London Authority (GLA) frequently conflict with the preferences of Local Authorities. These inconsistencies, often influenced by shifting local political dynamics, result in a prolonged, costly, and frustrating process for developers and investors alike.
Operational Experience & Funding
One key lesson from earlier co-living developments is the misalignment between the cost of amenity space provided and its actual usage. Previous projects placed heavy emphasis on community engagement, including extensive staffing, while overlooking co-living’s role as an affordable housing alternative, thus negatively impacting operational efficiency. Moreover, operational efficiency is further hindered by strict planning requirements, such as GLA stipulations for the number of kitchens per person (0.6 sqm per person) and the push for kitchens on each floor, irrespective of the number of residents. These prescriptive requirements can be impractical and impact both gross-to-net areas and operational costs. Once these challenges are addressed, it is expected that institutional investment in the sector will increase.
Opportunities
Tenant Demand
Limited data suggests strong tenant demand across operational co-living schemes. For instance, the two FOLK schemes in Harrow and Earlsfield have garnered substantial interest, highlighting the sector’s potential. The Living by Scape scheme in Guildford, which has 113 beds, was fully let within seven weeks, with an average tenancy length of 11 months. As the sector matures, co-living could perform similarly to BTR.
With growing emphasis on affordability and predictable future expenses, operators are finding that all-inclusive tenancies are particularly popular, allowing tenants to manage their finances while enjoying a high standard of living in desirable locations. With average monthly bills for a one-bedroom flat estimated at £336, tenants can save up to 15% by opting for a co-living apartment versus traditional private rented sector (PRS) accommodations plus bills.
Investor Appetite
More confident and adventurous capital is recognising the opportunity to capitalise on early-mover advantages, the current weakness of the pound, and the ongoing affordability crisis affecting private rents and first-time buyers.
However, the uncertainty created by ever-changing policies and the lack of operational security for potential investors is causing delays in the development of co-living as a more institutional asset class. As a result, many developers are finding their progress stalled until they secure institutional funding partners before committing to purchasing or delivering a site.
The Future of Co-Living
Looking ahead to the city of 2040, households will likely have access to a greater variety of living options, with co-living schemes catering to an increasing urban population and higher rates of mobility. Co-living could offer an affordable alternative to BTR for younger generations seeking to live in cities but unable to afford traditional rental models. The growing demand for diverse rental products could see co-living spaces integrated within BTR schemes, thus reducing risk for both investors and operators. However, significant changes to the planning system are necessary for this to happen. Co-living has the potential to be a key player in a post-pandemic world.
Ultimately, co-living development and investment are still in the early stages, providing a clear first-mover advantage. While often likened to ‘student accommodation for young professionals,’ investors are increasingly viewing co-living as a sub-sector of BTR, with significant synergies. Few developers, investors, or consultancies have a proven track record in this space, but opportunities exist. Cushman & Wakefield, for example, has been involved in a major co-living land transaction in Wandsworth and is currently advising several landowners on investment and land-related matters.
