UK Co-living – A market poised for huge growth

Co-living represents a contemporary approach to purpose-built rental housing, characterized by studio bedroom units and extensive communal amenities like gyms, co-working spaces, resident lounges, and cinemas.

Growing Appeal Among Young Professionals

The Co-living sector is rapidly expanding across the UK, with a wide array of investors, developers, and operators eager to move beyond traditional real estate asset classes into the ‘Living’ sectors. Several factors support the investment appeal of Co-living, including a chronic housing shortage, urbanization, decreasing household sizes, a growing population, and evolving consumer preferences.

A significant portion of the demand for Co-living comes from recent graduates and young professionals beginning their careers. This demographic is particularly attracted to professionally managed properties that are typically located near city center attractions and job opportunities. Co-living provides the amenities and community spirit they desire, often at a more affordable price point than other housing options.

Data from The Collective’s Old Oak and Canary Wharf schemes indicate that 79% of residents are between 18 and 35 years old. The social focus of Co-living can also help alleviate loneliness, thus supporting the mental health and well-being of young people.

Offering Flexibility for Those Priced Out of the Housing Market

With housing prices soaring to levels that make homeownership increasingly unattainable, especially for young people wanting to live near urban job hubs, Co-living has emerged as a viable alternative. The private rented sector has grown significantly, with nearly 2 million more households renting privately in 2019 compared to 2011, a 50% increase. London alone saw an increase of over 300,000 PRS households during this period.

Despite misconceptions, Co-living rents are not necessarily higher than those in the broader residential market. In fact, Co-living rents are typically about 20% lower than the total cost of living in other PRS accommodations. Many tenants find the convenience of having high-quality amenities and an all-inclusive monthly rent more than compensates for the smaller private space.

Concentrated Demand in Urban Centers

Savills’ research identifies the ‘core target market’ for Co-living by examining individuals who:

• Currently reside in the private rented sector
• Are aged between 18 and 35
• Live in child-free households
• Belong to affluent demographics with a propensity for shared living
• Can afford the median one-bedroom property in their local area by spending no more than 35% of their gross income on rent

The potential market size for Co-living in the UK is estimated at around 725,000 units, with London alone accounting for nearly 160,000 units. Other cities with substantial potential markets include Manchester, Leeds, and Birmingham.

When considering additional sources of tenants, such as adult children living at home, professionals seeking a pied-à-terre, and corporate lets, the broader ‘addressable market’ increases to about 1.56 million people. With growing affordability issues and a rising preference for urban living with community elements, Co-living is poised to become as established as BtR and PBSA, offering more housing choices.

Leading Markets and Local Authorities’ Role

Major urban centers dominate the Co-living market, with London neighborhoods like Mile End, Lewisham, Tooting, Stoke Newington, and Ealing being prominent. Outside of London, areas like Ancoats in Manchester, Central Birmingham, and City Centre Leeds also show strong demand.

As the market matures, more Local Authorities are recognizing and planning for Co-living. The 2021 London Plan introduced ‘large-scale purpose-built shared living’ (LSPDSL), setting criteria such as minimum scheme sizes and contributions to off-site affordable housing. The Greater London Authority (GLA) further refined these guidelines with specific requirements for amenities and room sizes.

However, some Local Authorities outside London, such as Birmingham and Liverpool, have set stringent planning guidelines that could hinder the viability of Co-living projects.

Evolving Designs and Increasing Room Sizes

Since the first Co-living schemes began in 2016, the design has evolved to attract less transient residents. This shift has led to improved common amenities and larger units. According to the Gravis Prospectus, larger units tend to have higher occupancy rates and renewals.

The latest Co-living schemes are proposing larger studio units averaging 20–25 sqm. Developers are advocating for the GLA to remove the proposed maximum room size limit of 27 sqm to offer more variety and price points.

Regional Growth and Investment Trends

London initially led the way in Co-living development due to severe affordability constraints, but regional cities are catching up. Currently, 60% of units submitted for planning over the past three years are outside London, with Manchester, Sheffield, Glasgow, and Birmingham leading the regional pipelines.

The total operational and future pipeline stands at around 24,000 units, split evenly between London and regional areas. Significant transactions amounting to approximately £540m are under offer and expected to complete in H1 2022, highlighting the sector’s growing viability.

Increasing Lender Support

While traditional BtR products have long enjoyed strong liquidity from both banks and non-bank lenders, Co-living initially faced more selective lending. However, over the past 18 months, more lenders have become interested in Co-living financing, offering terms comparable to traditional BtR products.

Savills’ Debt Advisory team has secured over £280m for Co-living projects since Q2 2021 and expects to surpass £500m by the end of 2022. As the bank market recognizes the potential of Co-living, institutional capital deployment is increasing, demonstrating the sector’s long-term viability. Savills has arranged debt for various investor strategies, including forward funding, develop and hold, converting standing assets, and bridge facilities for planning processes.