By Alex Gibbs, Co-Founder and Director, Built Asset Management
For those immersed in the world of residential real estate development over the last few years, it will have been near impossible to avoid the buzz around the concept of coliving; units built for the rental market, specifically designed to offer houseshare-style living, predominantly to the young-professional market. Private bedrooms, shared communal facilities, and a strong community ethos are characteristics central to this genre of accommodation.
With global funding for coliving increasing 210% year on year to June 2019, and many of the prominent voices within the real estate sector tipping this asset class to absorb increasingly punchy volumes of institutional capital moving forwards, it’s easy to see why the concept has caught the attention of a multitude of developers.
Across a variety of global cities, the young professional market has demonstrated that, not only is it willing to share its communal spaces, but, in exchange for flexibility, an all-inclusive, hassle-free charging model and access to some convenience-led services (think onsite gyms and mobile laundry), it’s willing to pay a premium to do so.
With demand for coliving units predicted to continue the steep upward trajectory and expand beyond the reaches of just the major global cities, the benefits to developers are clear, with higher yield per square-foot sitting at the top of the list. However, many are put off the idea for several reasons including fear that more residents equate to more headaches, confusion around communal liability, and a knowledge that more moving parts can equal more going wrong. This is where coliving operators come in.
What is a coliving operator?
Unlike letting agents, coliving operators typically take properties on medium to long term leases from property owners and inherit all the liabilities of a tenant. Operators will guarantee the rental income for the duration of the arrangement, while absorbing all of the work associated with property management; negating the need for a third-party property manager.
Operators add in additional services such as all-inclusive bills, commercial-grade wifi, cleaners, gardeners and high-quality furnishings, and charge their clients on a per-room or per-head basis. In some circumstances, they may wish to publicise the development within the umbrella of their brand (this is usually more relevant for larger developments where all units have been transacted with the operator).
How does the relationship work?
Coliving operators can come on board at any stage of the design and build process. Step one is to appraise the units in question and offer a valuation based on potential yield. It’s at this stage that T&Cs can be discussed, such as contract length, number of units taken and maintenance liability outside of general wear and tear. It’s often not an ‘all or nothing’ approach to securing units; typically coliving operators can offer flexibility on how many units they take control of, ranging from a handful within a development to the whole scheme. Once the building is ready for tenants, the rental process is entirely taken care of and returns are seen from day one.
As a developer considering this route, it’s well worth involving a coliving operator at the start of the process – as they may be able to offer invaluable advice when it comes to layout and facilities in order to maximise yield. More established operators, such as BAM, will also get involved from the very start of a scheme, providing proof of future income and a strong, established covenant which can be incredibly beneficial when it comes to securing funding for a project.
It’s important to note that coliving operators don’t deal exclusively with developers who have set out to build coliving units. At BAM, for example, there is an entire business division that deals exclusively with operating existing residential property stock, so it can be well worth exploring this route if you have a pipeline or completed development and are interested in fixed returns and reduced hassle.
The benefits of working with a coliving operator
The key benefits of working with a coliving operator centre around minimising hassle, mitigating risk and reducing cost.
One lease/rental agreement with a single entity spanning three+ years represents significantly less transactional work than negotiating and transacting potentially hundreds (depending on the scale of your development) of separate rental agreements which expire each year. This contrast is further highlighted where property management is concerned. Dealing with one company tenant with an incredibly detailed knowledge of how best to mitigate property management issues, along with a comprehensive understanding of the liability matrix when issues do occur, dramatically reduces volume of work and hassle in this area.
If there was previously any doubt, 2020 has shown us that markets can be uncertain. London experienced something of ‘rental exodus’ in March and April, and by the beginning of July there were over 440,000 tenants in rental arrears across the UK. There is no doubt that plenty of developers, landlords and investors wished they had fixed income returns on their assets for three+ years to see them through the storm. Utilising the right operator can provide void-free fixed income to a Build to Rent developer, giving them accurate forecasting ability and rendering them immune to unfavourable market conditions, seasonal slumps and the inevitability of at least some void periods.
Reduced cost is seen in the form of eradicated marketing spend. For smaller developments, lettings agents’ fees need to be factored in, for larger developments, the cost of in-house lettings/marketing personnel often needs to be borne. If working with a coliving operator, the cost of marketing will be nil. Owing to the fact that operators add in additional services and charge on a per-room or per-head basis, their margin is extracted from the total revenue they receive, minus cost of the lease plus additional services. This means there is no spend for the developer, landlord or investor associated with the marketing of the units. With typical lettings agency fees in London sitting between 10% and 17% plus VAT, this saving can put a notable amount back onto your bottom line.
Potential pitfalls and best practice
In exchange for the aforementioned benefits, operators are likely to demand swift responsiveness and strict adherence to recommended timescales when dealing with structural issues that remain the liability of the property owner. While this should not be viewed as a negative by a diligent landlord or developer, it’s important to note that, assuming you’ve selected the right operator, you will be partnering with an entity with high standards which knows exactly where it stands in terms of contractual obligations.
Additionally, as you will likely still have at least some liability for the upkeep of the asset (even if only structural), the operator is effectively branding and selling your service when it comes to reparations in this area. Therefore you should expect them to demand urgency and high-quality work if and when issues do arise.
When selecting an operator to partner with, it’s important you do your due diligence by carrying out deep and thorough financial checks. As well as looking into the trading history of an operator, you need to be sure they have the means, cashflow and liquidity to take on the liability of guaranteeing your rental income. Remember to analyse these factors in the context of a down market, as this is precisely when you will most need them to uphold their end of the bargain. Accreditations, credible board members, and positive reviews from owners of buildings that they currently operate are all further markers to seek out when going through this process.
Importantly, you also need to ensure that a potential operator is a good fit for your own brand and property vision. These relationships span multiple years in their most common guise, so check what the operational intentions are for their business. You don’t want to strike a five-year deal with an operator, only to find their owners’ intentions are to sell the company within 12 months.
It’s important that their brand ethos and client profile align with your vision for the development. You probably don’t want to agree a deal with a student operator on a handful of units in the middle of a luxury development aimed at high-flying young professionals. Likewise, short-let operators and permanent residents often don’t mix well (not to mention the fact that they require different planning classifications).
Ultimately, you should view a relationship with a coliving operator as a long-term, mutually beneficial business partnership. In the most successful instances, coliving operators can guide your investment and development strategy, provide guaranteed rental income for your real estate over the long term, and take the cost and the hassle out of monetising your asset.