DTZ Investors created one of the first funds dedicated to the delivery of coliving developments. Can you share a bit more about your decision to create this dedicated coliving fund and what you have been up to with COLIV to date?

The initial idea for creating a coliving fund came as a result of noticing the issues faced by solo renters in the London residential market. A lack of affordability means that most people coming to London are forced to live in flat shares in buildings that were originally designed for family occupation. These buildings are typically owned by non-professional landlords and offer a low level of customer service, with renters often left to deal with bills and maintenance issues themselves. Therefore, we came to the view that the traditional rental model was no longer fit for purpose. However, the new stock that build-to-rent providers were building wasn’t meeting the needs of solo renters either. Luxury one- and two-bedroom apartments are just not affordable to somebody looking to live in London and earning under £40k a year. It was at this point we were introduced to The Collective and had the opportunity to explore their coliving building in Old Oak Common. We were struck by the vibrancy of the building. We could see how the concept of coliving could enable people to live together in a more affordable and sustainable way. The building was well managed, offered residents with high-quality private space as well as access to a wide range of amenity space; however, what impressed us most was the sense of community that had been created throughout the building. We decided that this was the way we wanted to access the London residential market for our clients.

Some time later the COLIV fund was launched. Despite a somewhat challenging backdrop for the first year of the fund’s life we have made some excellent progress, having invested in three coliving schemes to date with a projected Gross Development Value (GDV) of c.£200m. The fund’s first development funding, a 222-unit scheme in Harrow, is progressing well and is on track to achieve practical completion in autumn 2021. Last October we started on-site on our second scheme, a 330-unit coliving building in Earlsfiled, and in early 2021 we aim to begin construction on a 270- unit scheme in Battersea.

In our view, the pandemic has only made the case for coliving stronger, as going forward, renters are increasingly going to value the benefits of professional management, access to home working space and the built-in support network the coliving communities can provide.

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‍When you are exploring investment strategies, what are you looking for in regards to your investment criteria for shared living developments? Are there some development and operational innovations that you tend to lean towards? How important is impact and sustainability in your investment criteria?

There are some aspects of our investment criteria that are fundamental regardless of the type of residential property you are investing in. Location is one of them. Coliving is a car-free way of living, therefore it is essential that the properties we invest in are located in areas that provide easy access to central London via public transport. For example, the Harrow property is within five minutes of an overground metro line with regular 13-minute services to Euston in central London.

It is also important for the product we deliver to be affordable relative to the existing build-to-rent offer in the local market. Ideally, we are looking for the all-inclusive cost to be 15-20% cheaper. We are also targeting 25% on-site affordable housing across the portfolio. In the case of our Earlsfield and Battersea sites, 35% of the rooms will be let to key workers at discounts of between 25-40% to market rents.

In terms of the property itself we believe that each studio should have everything it needs for private living; for example its own kitchenette and en-suite bathroom. However, the idea of coliving is not that people live in their rooms, therefore there needs to be a high provision of communal amenity space within the building. We typically look for at least 20% of the space to be set aside for amenities.

Operationally, it is important that we create a strong sense of community within the building. Firstly, this is achieved by having a building with a purposely- designed layout that promotes social cohesion, and secondly, by employing a management strategy which puts real emphasis on enabling vibrant and supportive communities to develop. A daily programme of social and personal development events provides the opportunity for members to meet up with likeminded people, have unique experiences and learn new skills. The members are given the opportunity to give back to their communities by holding their own events or acting as a mentor or ambassador. The result is an open and friendly community environment that everybody feels a part of.

However, the fund’s ambition is not just to have a positive impact on residents within the property but also on the local community. For example, for each property we are putting in place a community investment plan that identifies 10-15 local charities and social groups that the building can help support, either through volunteering or through using the building for events. We are also setting aside 5 rooms in each asset to support a local housing need. These will be provided at a deeply discounted rent. In the case Earlsfield, this will be to support young adults coming out of foster care. As you can see, it’s not just about delivering an investment return, we also want to have a positive social impact, and with coliving assets it is possible to have both.

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Now to get into some specifics: when you invest in coliving buildings, how important is convertibility back to traditional rental models (e.g build to rent (BtR) / multi-family)? Is it a must at the moment and do you see this changing in the next ten years?

When we are underwriting any coliving investment we always take into consideration the asset’s alternative use value. Due to room size restrictions, conversion to a traditional BtR (C3 consent) is not easily achievable for coliving assets in the UK. However, there are other residential uses that coliving buildings can easily be converted to at little or no cost, depending on the asset’s planning use class.

In the UK, for a sui-generis consented scheme (e.g. coliving scheme) the obvious alternative use is Purpose Built Student Accommodation (PBSA). There is no reason why a coliving asset could not be let-out entirely to students, should an operator want to; however, a PBSA scheme could not be let-out on a coliving basis due to its occupational restrictions. So are the operational risks higher with coliving or PBSA? That’s why you need to have a view on local PBSA rents. Fortunately, in London there is a shortage of quality student accommodation and therefore there is no real rent differential between coliving and PBSA; however, that might not necessarily be the case in regional UK markets.

For a C1 consented coliving scheme the alternative use is likely to be a hotel. Again, conversion costs are likely to be low. From our analysis, cash-flows and cost-per-bed are comparable and as such coliving can be underwritten by this alternative use.

Over time, as coliving becomes more widely understood as an operational model, there will inevitably be less focus placed on an asset’s alternative use value. That said, a diligent investor or developer will always have regard for what value can be generated from different uses of a property before making an investment decision.

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Do you see coliving as its own asset class (such as PBSA) or a sub-type of other rental models (e.g. BtR/multi-family)? Is this distinction even important, and why or why not?

For me, coliving is not a new residential sector, but a niche part of BtR targeted at a particular type of tenant: young professional solo renters, which interestingly make up a large part of the London rental market. However, I’m not really sure that distinction matters, as the underlying cash-flow from coliving is no different from other parts of the BtR sector. It is the restrictions on how a property can be operated that define specific types of residential property. For example, PBSA is distinct as the property can only be let to students; similarly, senior living caters only for people in the later years of their life. In contrast, a coliving building - although targeted at younger solo renters - can be occupied by anybody and therefore is no different than traditional BtR. It is simply adding to the range of housing solutions that an individual has to choose from.

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From DTZ’s perspective, what is the ideal size (bed count) for coliving developments? Is there a size too big or too small that DTZ would not even consider? Is there an ideal bedroom size for optimal ROI/profitability versus customer experience as well?

We have made the decision to focus on large-scale coliving developments, by which we mean 200+ units per property. Clearly there are both development and operational efficiencies that come about from developing and managing larger properties that make it easier for investment appraisals to stack up the more units you have. Amenity space is important to our business model and with larger properties it is easier to pack more of this in. It’s hard to justify a gym or dedicated co-working space if you only have 30 residents. Therefore, larger schemes are more cost effective and offer greater potential to provide the amenities and support services that residents demand.

We also believe that scale also makes it easier to create a diversified community within the building. In smaller properties it is more difficult to make some community building aspects of coliving work. The events programme is a good example of this. Every day there are several events that are organised to promote personal development, encourage resident interaction and curate fun. With too few members it is not possible to get the attendance needed to make these viable. Also, around half of the events are put on by the residents themselves, therefore you need the community to have a diverse range of skills, interests and experiences, which only comes with scale.

It is hard to say whether there is a maximum size of scheme at which community benefits start to erode. If a building reaches the point where there are so many residents that it starts to feel impersonal, then clearly the benefits of coliving are being diminished. In our view, a building with over a 1,000 units could find it more difficult to build a community that everybody feels part of; however, until one is built and operated, it is purely speculation.

In terms of room sizes the fund is ideally looking to invest in properties with a minimum unit size of 16sqm. The idea of coliving is that you spend a large proportion of your time in the building using the shared spaces, therefore having a large amount of private space only detracts from this philosophy. There is also some economics behind this. In order to provide all of the amenity space at an affordable rent, and still make the development scheme viable, room sizes need to be smaller than conventional build-to-rent units. Coliving is therefore providing those who would otherwise not be able to afford it the opportunity to live in high-quality, amenity-rich, professionally-managed accommodation.‍

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Finally, let’s look into the future ... Let’s discuss the investment horizon for coliving in 2021, especially after a year of a global pandemic and a potential economic crisis also looming in the next few years. Have you noticed any difference in investor appetite in coliving in 2020, and what do you think it will look like in 2021 and beyond?‍

Speaking to potential investors in 2020, one thing we noted was that belief in the concept remains strong. We rarely speak to a potential investor that doesn’t see a place for coliving within the range of BtR products in the market. Early on in the pandemic we did receive a lot of questions with respect to how coliving works in a socially distanced world; however, it was easy to demonstrate how this could be addressed within a professionally well-managed building.

We were also able to demonstrate the benefits of living in a coliving building during the pandemic, especially when compared to those who were stuck in unsuitable house shares or lonely one-bedroom apartments. Coliving provided people with an in-built support network, helping them to get through the worst of lockdown, and most importantly, still enabled them to benefit from human interaction. The variety of amenity spaces also made it easier for people to work from home. Therefore, we were able to show that the case for coliving was stronger than ever.

The other thing we noticed about investors in 2020 was that they were taking much longer to make investment decisions. This was hardly surprising given the uncertainty caused by the pandemic. It was also not specific to coliving, but across all property sectors. As we move into 2021, and the potential roll-out of a vaccine, we are confident that investor appetite for coliving will increase. The main focus for most investors at the moment is ‘beds and sheds’. The past has shown that the residential sector has always proved to be more resilient during an economic downturn, and therefore coliving, which is at the more affordable end of the BtR sector, should continue to attract investor interest, even as the economy struggles.

How coliving evolves beyond 2021 will depend on how the schemes in the development pipeline perform. The biggest hurdle for some institutional investors at present is the lack of operating evidence. However, with construction underway on a number of large- scale coliving schemes and further schemes at various stages of the planning process, 2022/23 should start to see more operating assets come to market. This can only be good for coliving and will enable interest in this type of residential investment to move to the next level.