A spotlight on co-living

Against the backdrop of significant housing supply challenges, institutional investors are turning their focus on this emerging asset class as developers and operators race to establish their brands, writes Russell Wright-Turner, partner at Zerum.

The UK property sector is constantly evolving, shaped by a complex interplay of political, economic, and social factors. A cocktail of domestic and geo-political crises concurrent with technological advancement and generational evolution has seen the continued emergence of ‘co-living’ in the residential sector.

Evolution of tenants requirements

Demographic shifts have redefined housing preferences, with generational priorities moving away from the suburban homeownership goals of previous decades. Today, Gen Z and Millennials comprise the largest share of the workforce and are navigating numerous challenges including:

• A sharp rise ininterest rates in 2022/23 after years of historic lows (BOE currently at 4.75%).
• Persistent high inflation that peaked in recent years at a high of 11.1%, however now stabilising at 2.5%
• The enduring mental health impact of COVID-19
• The rise of remote working
• Increasing generational expectations around sustainability.

These factors are reshaping tenant priorities including historic ownership aspirations.

What is co-living ?

Co-living seeks to fill a gap in the market by providing high-quality residences in prime central locations at affordable prices. The model aims to offer flexibility and a community-led lifestyle and is targeted at young professionals aged 18-30. They’re generally single, chasing both affordability and high-quality products,while working in the city.

Manchester is second only to London in terms of its graduate retention rate. The city manages to keep 51% of students after graduation, creating a natural opportunity for co-living developments in the city. Generally, co-living offers more affordable rents than other private rented stock, as well as boasting dedicated community managers, regular events with proper management/external guests, utilities included, and more amenity space per habitable room (3-5.5/m2).

Any development needs to put community at the heart of its strategy and create spaces of purpose with key focus on resident engagement. They should create a culture where residents are consistently engaging with each other, attending community events, and sharing amenity space. This also helps create a sense of belonging, improves mental wellbeing, and reduces feelings of isolation.

What matters most?

Location is critical to any successful co-living scheme. They must be situated within close proximity to employment hubs, education institutions, and public transport nodes as well as food, beverage, and entertainment venues.

Every scheme needs a standout factor and a reputation for efficient and effective management. Rooms need high-quality furniture and finishes and schemes need to be designed in a way that makes residents feel secure, safe, and welcome. Gyms are now supplied as standard, along with co-working space supported by superfast Wi-Fi, and other technology-integrated solutions.

Amenity spaces need to be designed in a way that can hostlarge groups of people, foster engagement via entertainment rooms, lounges, cinema rooms, all while encouraging movement between spaces.

Viability landscape

Institutionalised funding has played a pivotal role in propelling the co-living sector forward. The sector offers several advantages including strong rental income -enabled by higher unit density- stable cash flow, and higher yields. Exceptional demand, coupled with low vacancy rates, has further underscored its popularity with investors to date. A broad demographic appeal across numerous cities also provides investors with opportunities to scale.

While still maturing, the co-living sector demonstrates the potential to deliver relatively quick stabilisation for investors.

However, challenges remain, particularly around build cost viability. With tender price inflation forecast to be around 3% in 2025, establishing robust and realistic budgets from the outset is crucial. Efficient design and smart procurement strategies are essential to mitigate cost pressures.

Furthermore, stakeholders must continue to address the implications of the Building Safety Act, which has introduced significant programme and responsibility considerations. As such, it is critical for clients to engage with experienced consultants with a proven track record across all disciplines to reduce their overall risk profile from the start.

Zerum are currently delivering cost and project management services on Progressive Livings 42 storey tower in Salford delivering over 568 co-living units.

• Russell Wright-Turner is partner at Zerum