The pursuit of stable, steady and counter-cyclical income streams has supercharged the growth of operational real estate, with Build to Rent, co-living and PBSA becoming growing fixtures in portfolios from European and American investors across all risk profiles.
By Zafar Bhunnoo, Co-Founder and Co-CEO, Balance Out Living
There are now 240,000 Build to Rent homes in the UK (pipeline included), while recent research from Savills claims that the co-living sector pipeline has reached 10% of that, approximately 12,000 of which are in London. The thoughtful amenity, community-oriented, and professionally managed model is firmly in the sights of renters and local authorities alike.
Vertically integrated models have become well established in Build to Rent – the likes of Greystar, Quintain and the Apache Capital/Moda Living JV being some of the first to recognise their suitability, joined more recently by investment titans like Macquarie through their Goodstone Living platform.
In co-living vertical integration is less common, owing primarily to the fact that the planning journey isn’t the most straightforward, meaning the pipeline is much smaller and more fragmented than its Build to Rent cousin. We will be delivering our 1,900 homes – which accounts for around 16% of London’s co-living pipeline – through this model and see it as essential in ensuring the right capital, fully aligned with the proposition, is deployed towards the sector so its potential can be reached.
Both Sarah (our co-founder) and I have had a lot of experience in co-living and the various verticals – and put it to successful use when we built out and stabilised portfolios with The Collective and Spaces. Doubling the number of units on an original planning consent, or doubling yields within four months through smart ops, tenant acquisitions and NOI spikes are a few examples of this in action.
Across all asset classes vertical integration is about generating value at each stage of the asset lifecycle – where performance is enhanced and optimised, and risk managed and reduced by ensuring there is a cohesive end to end vision that all stakeholders along that lifecycle are fully bought into.
With a clear vision communicated, the management team can leverage relationships and secure buy-ins with key external partners and stakeholders at the various stages – from site-finding through to acquisition, planning, design, build, operations, stabilisation and exit. Decisions at the outset of the journey are made with cognisance of every milestone.
This is appealing to investors because it creates alignment and demonstrates a clear pathway to deploying capital sensibly, efficiently and effectively. The framework can be replicated and iterated which creates economies of scale and further aligned interest with all partners right across the value chain. Ultimately this optimises capital utilisation, market awareness and derives the highest possible asset value.
Greater control over spending, and the ability to adapt op-ex and cap-ex plans at pace is a significant benefit and particularly attractive against the current economic backdrop. Vertically integrated businesses are by no means shielded from the macroeconomic headwinds that loom large, but the added flexibility and speed at which they can move arguably act as further lines of defence.
Getting schemes off the ground and leased up as quickly as possible will prove to LA’s there is demand, longevity and credibility for co-living, and give core investors access to stabilised assets – both will be crucial to the growth of the sector and ensure cheaper and longer-term finance becomes available.
Conveying the brand is another area that benefits from vertical integration, and a further illustration of where residential can learn from its commercial counterparts. Operational resi for rent is at the intersection of residential and hotels, where clear and recognisable identities need to be created on a conceptual level. People are becoming increasingly conscientious of who they consume with, their experience with them, and whether there is alignment with their own value system. These are ingredients for ensuring customers come back to the brand.
What it means to be a Balance Out Living, or a Moda, Fizzy, or Tipi – examples of strong brands – needs to be considered from day one and throughout the lifecycle from there on in. Working under one vision is the best way to achieve this, with more efficient lines of communication, deeper cultural synergy and a more homogenous unit in place.
There is no doubting the demand for co-living and its place in our national housing mix as economic, demographic and structural factors converge. The next phase of its growth rests upon development partners being able to secure large capital commitments from investors, and I have no doubt that an end-to-end model that optimises costs in an era of high ones, and creates additional value in a sector that already operates on tight margins, will be the key to unlocking this.