Co-living gathers momentum in Europe

The pandemic, skyrocketing house prices and a desirable style of living are reshaping what young professionals seek from their living arrangements. But for gen Zs, in particular, the prospect of leaving university and moving into a house in multiple occupation (HMO) is, like, so last year. Enter co-living.

Co-living takes the idea of shared living spaces to a new level. While a prior generation of renters may have shared kitchens, bathrooms and utility rooms with their housemates, co-living seeks to promote community and convenience with on-site gyms, service staff and the prospect of connecting with a like-minded community.

What emerged as a response to an affordability crisis in Asian tech hubs is now seeping into the western market, with both investors and potential residents eyeing up attractive opportunities from this new way of living.

Young, employed, lonely

Global investment in co-living developments increased threefold each year between 2015 and 2019, according to JLL, but the pandemic “amplified” the motivations for western consumers to be drawn further to co-living, says Richard Stonehouse, head of residential investment at commercial real estate services firm Avison Young.

The allure of urban locations runs parallel to issues of loneliness and affordability for young professionals. Meanwhile, the premium end of the build-to-rent (BTR) market is demonstrating the “ambitious rental levels” that the millennial demographic tenants are willing to pay for a quality home with excellent service, amenities and community, adds Stonehouse.

“The co-living market focuses on these qualities while appealing to a broad, aspirational and transient demographic that may be unable to pay the levels [these BTR] schemes are achieving,” he says.

Similarly, Ben Pile, manager Barings’ head of residential investing and asset management, Europe, says that “affordable, good-quality alternative accommodation” is emerging in cities where “living is expensive and will become increasingly so as the cost of living crisis hits everybody.”

In London – a city that retains 47 percent of its graduates and attracts one in four of all other graduates in the UK, according to CBRE – the co-living boom is already maturing.

“Areas with significant higher education establishments with strong retention rates and high levels of inward migration and low unemployment are likely to be where co-living works best”

Richard Stonehouse
Avison Young

Co-living on the continent

The Co-Liv Fund, launched as a joint venture between co-living provider The Collective and DTZ Investors in 2019, became the UK’s first dedicated co-living fund and has a target gross asset value of £1 billion ($1.23 billion; €1.17 billion).

Elsewhere in Europe, the same economic and social drivers are creating similar investment opportunities. In April, Barings announced its entrance into the Italian residential BTR market with the acquisition of a development opportunity in northern Milan, complete with co-living offerings.

“The residential market in Italy has been very small historically by western standards, but increasingly that’s changing,” Pile says. “Traditionally, people have bought in Italy, but house prices have got to a level where there’s a certain level of unaffordability, and increasingly people are turning to the rental market as an alternative because they can’t afford to buy where they want to live.”

Across Europe, the response to this widespread trend is “the most advanced” in Spain, but Italy, Germany and France are also close behind, notes Pile.

Stonehouse says there is some debate as to where co-living will grow in the years ahead, but he views urban environments as likely locations attracting gen Z and millennial occupants.

“Areas with significant higher education establishments with strong retention rates and high levels of inward migration and low unemployment are likely to be where co-living works best. However, many operators, particularly those focused on small to mid-size schemes, see the geographical demand being much wider,” he adds.

Back in the UK, and looking beyond London, co-living schemes in Reading, Manchester and Leeds already have been completed. But in Liverpool, the city council signed off on a planning advice note in March that placed co-living developments, which had not previously fallen within a particular planning class, under the umbrella of existing residential policies. This means facilities must adhere to minimum space standards and be easily converted into regular accommodation, raising questions about the feasibility of the co-living approach. Similar regulatory moves elsewhere could create additional hurdles for co-living.

Investor interest

For investors and developers, the attraction to co-living in Europe comes in the form of “lower amounts of competition generated by a nascent market,” says Stonehouse. Alongside this comes the opportunity for “considerable growth” and a perception that a larger rent roll can be “created through smaller unit types and a payment in lieu of affordable housing.”

The softer factors are important, too. Community, which is one of the “principal drivers of the growth of the BTR market,” according to Stonehouse, is also at the heart of co-living. Meanwhile, the provision of “support to individuals’ lifestyles and well-being, as well as a natural affordability” means investors can create social value, enabling a thematic integration of ESG factors.

Pile points to the “health and well-being of the ultimate customer,” as a social factor considered by investors, whether that is “the receptionist or concierge being there” or the classes you put on in the gym – “yoga or Pilates, whatever it might be.”

While some may view this as a superficial add-on to a tenancy, Pile points out that modern tenants are “much more focused on the environment than historic occupiers” and they are looking in earnest at how the landlord or developer is “taking that into account for how the site is operated.”

That includes generating as little waste as possible, minimizing plastic on-site, assessing how energy efficient the building is or whether it is using renewable energies, among other factors. “This feeds into the end consumer’s decision-making process much more than it did five years ago,” Pile adds.

As such, private equity has “raced toward the sector, seeing the ability to create scale and rental outperformance as the market matures,” explains Stonehouse. “Inevitably delivering a scaled, operational platform over time will prove extremely attractive to more institutional capital, affording the opportunity to create very significant capital appreciation.”

Co-living has gathered momentum over recent years, and as the number of renters across Europe increases, there is an opportunity for investors to diversify their real estate portfolio while creating attractive forms of alternative living.