Polarised debate misses the nuances of Co-Living

The Old Oak co-living development

Jonathon Ivory GUEST WRITER Managing director, Packaged Living

Rabbit hutches. Corporate dormitories. Nomad nests. A brief online enquiry into co-living can throw up some rather unflattering names for this emerging asset class. However, carry on reading and it won’t be long before you come across the exponent’s counter-narrative: community, wellness – and my favourite – the antidote to modern-day loneliness. Has there ever been such a diverse opinion regarding the humble apartment?

But like most debates these days, this lacks nuance. Lost in the noise created between “cynical developers” on one side, and “evangelical operators” on the other, are the hard facts which have given rise to this sector.

Market drivers

One of these hard facts is that average London house prices have inflated by more than 70% in the past decade. Average London wages have risen by less than half that figure over the same period. The result? The affordability ratio is now >13x and it takes London’s middle-income earners more than 18 years to save the necessary deposit required to buy a home.

So, if would-be homeowners can’t buy, ergo they must rent. However, the affordability challenge doesn’t end there, because the average London one-bed apartment now consumes more than 50% of the average gross income. Put another way, this is 20% more than what is deemed to be “affordable”.

Contrary to what some practitioners might have you believe, the principal role of co-living isn’t to promote the use of communal kitchens to Millennials and Gen Z – although that may be a byproduct. It is to offer professional managed rental accommodation at a discount to that of traditional apartments.

The average London one-bed apartment now consumes more than 50% of the average gross income

For example, imagine two seemingly identical apartment buildings on opposite sides of the street in London’s zone 2. The bulk, massing and specification of both buildings are identical. However, one is a multifamily block populated by one-, two- and three-bedroom apartments, while the other is a co-living community comprising studios. The 35 sq m multifamily one-bed apartment is priced at £2,000 a month (excluding bills). The 20 sq m co-living studio apartment is priced at £1,500 a month (including bills)– at least 25% cheaper.

The resident now has a simple choice. Space versus price. In a high-value, supply constrained market like London, where affordability is at its most acute, residents are increasingly choosing price.

Co-living may not be the answer to the UK housing crisis, but it is a positive response to it. Each development is based on the “three Cs” principle: convenience, community and collaboration. The homes are professionally owned/managed and designed to meet the needs of private renters seeking affordable, hassle-free city living, with a strong sense of community and shared values.

Not so short-term

Savills estimates the size of the target market in London to be at least 750,000 potential residents (i.e. those aged 18 to 35 living in the traditional private rented sector). That number increases to more than 1.5 million if the wider addressable market were increased to include those living with parents, corporate lets and pied-a-terre users, which speaks to the sector’s wide demographic appeal.

Yet with fewer than 5,000 operational units, the penetration rate stands at less than 1%. Does this remind you of anything? Multifamily circa 2012? Single-family circa 2020? If the past is anything to go by, we are at the genesis of a new institutional asset class.

“Co-living may not be the answer to the UK housing crisis, but it is a positive response”

But isn’t co-living punctuated by the short stays of its residents and related inefficient operating expense ratios? Not so, according to our analysis. The resident profile of co-living is increasingly beginning to reflect that of multifamily, i.e. long-term leases, high renewal rates and efficient operations. Anecdotally, recent lease-ups are trending at an average of 60 units a month.

Here at Packaged Living we are “all-in” on co-living. Having led starring roles in both the multifamily and single-family movies, we are looking forward to playing our part in the third instalment of this exiting trilogy.