Recently we have seen the beginnings of institutional investment in the nascent co-living sector, with the launch of the Co-Liv Fund, a joint venture between DTZ IM and The Collective, which has given this new sector a boost. The seed asset in the fund has been the forward funding of a 222 room sui generis scheme in Harrow and Wealdstone. However, in the absence of transactions, ‘How do you value co-living?’ is perhaps the question we are being asked the most often. A good starting point for any valuation is who would be in the market. In our view, the potential pool of investors is quite wide.  The active developers in the market fall into two main camps so far: the co-living specialists, for example The Collective, and those for whom co-living is a diversification of other activities such as student accommodation, or as a strategy to unlock difficult sites or assets. Investors could be drawn from the student accommodation, build to rent or hotel sectors, or hybrid operators, all of which have some overlap with co-living. The product could also appeal to the institutional market with an operator management agreement. In terms of pricing, the levels of return would need to compare sensibly with other ‘bed sector’ investment opportunities.

‘Hotelification’ of real estate is a term we are hearing mentioned. One trend we have noticed is that developers and operators are thinking very deeply about their service and amenity offering, as brands are embracing their service and amenity offering as their key pitch to residents and accepting that their rooms are not the only attraction. Co-working spaces, on-site F & B, gyms, concierge and room cleaning are equally part of the package. From a valuation perspective we are often having to consider a mixture of long stay and short stay income, with associated room rates, cost leakage and cap rates for each revenues stream. Some operators are also promoting their service and amenity proposition as a key driver of enhanced room rates.

As with other bed sectors, the income method is the primary method of valuation. Planning use class and conditions will determine the proportion of long and short stay and length of stay, and may stipulate occupier groups, which may have a bearing on valuation. We suggest applying different yields to long and short stay income, to arrive at a blended yield. The resulting valuation can then be benchmarked against transactions in other bed sectors analysed in terms of price per room, such as PBSA and hotels. Comparison with other sectors such as residential sales values could be interesting, since investors often like to compare values in different uses on a £ per sq ft basis, especially in London.   

In terms of cap rates, we would expect these to sit between the build to rent and PBSA sector for long stay income, depending on location, design and the tenant profile. Yields on short stay income would be higher than for long stay and more aligned to hotel cap rates.

Yields in bed sectors Q4 2019 (CBRE published yield categories)

Sector

London Zone 1

London

Zone 2

London

Zone 3-6

Outer London/ South East

Larger Regional Towns

Build to Rent

-

3.25%

3.5%

3.75%

4.25%

PBSA Direct Let

4.00%

-

-

-

5.00%+

Hotels VP (upscale)

4.50%

-

-

-

6.25%

Hotels Management Contract

5.50%

-

-

-

7.50%

Hotels Lease – Prime Covenant

3.75%

-

4.00%

-

4.25%

 

Rental Levels

Planning conditions may have a key bearing on rental levels. Long stays may be aimed at single professionals but could include students unless specifically excluded. It is worth noting that students may have a bigger budget for accommodation than the working population. Students take accommodation for a defined period of up to 3 years, and can borrow their rent money, which professional people are not able to do. Professional people, whose budget is determined by salary levels, student debts and other financial pressures, may in fact have less ‘budget elasticity’ than students. As the built product is very similar to PBSA, it is appropriate to make comparisons to PBSA rents, as well as build to rent and the general rental market. Rents need to be set at a level which is geared not only to local salaries, but which also compares attractively to other rental alternatives, after the whole package is taken into account. If the location will support short stays, the rooms rates will be determined by depth of demand and local hotel competition.

Operating Costs

As a rule of thumb, we would expect long stay costs to be around 25-30% of gross income, similar to student accommodation and build to rent. However, costs for short stays could be much higher, and are a key driver of value. The level would depend on length of stay and level of service.

Council Tax 

Whereas students are exempt from Council Tax, other tenants will need to pay it. There are few worked examples of how bandings have been assessed in co-living schemes in practice. Developers may need to negotiate the assessment with the Council Tax authority. Hotels may be subject to business rates or a combination of the two. Whether Council Tax is included in the rent, or charged separately to residents, needs to be considered. Developers are advised to seek specialist advice in this area.

Parking   

Another key difference between professional people and students is that the former category may expect to own a car. Although parking in new build schemes is generally discouraged by planning authorities, a parking solution of some kind is desirable, either on site or in a car park, especially outside of London. Office conversions often come with some parking spaces, which is one advantage of this planning route.

VAT 

This is another complex area. VAT would be chargeable on short stay income. In schemes consented under C1 hotel use, it is also chargeable on long stays at 20% for the first 28 days and at 4% thereafter. We recommend interested parties obtain specialist VAT advice from a tax adviser.

CBRE can provide specialist valuation advice on co-living schemes and sites.