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Can Medici Living break ahead in co-living?

2 MIN READJanuary 30, 2019
Six years ago, Gunther Schmidt faced a problem. He was running a successful, fast-growing  tech start-up in Berlin, backed by Goldman Sachs. The business had nothing to do with real estate - it was all about consumer reviews and ratings, ranking things from one to five. The company was growing fast and needed to hire lots of people.

Sitting around a coffee table, Schmidt had to convince people to start to working with them. Yes, there might be a culture fit, the right skills and matching salary expectations. But, says Schmidt, the most important question was: “When can you start working? What about first thing tomorrow morning?”

The problem was that people couldn’t move quickly enough. “So we created a co-living apartment as the solution. People could just turn up with their suitcase. There would be smart furniture and Netflix, and they would be integrated into a community. They might have a 1,000 friends on Facebook, but no real friends, and we brought people together.”

Essentially, the co-living apartment was a recruitment tool. “We never intended to make it into a company,” says Schmidt. “Then other tech entrepreneurs approached me for the solution. That was the point when I realised there was massive demand.”

Co-living development platform

Six years on, and Schmidt finds himself co-founder and CEO of Berlin-based Medici Living, currently providing accommodation for 1,800 people under the Medici Living brand for students and the Quarters brand for young professionals. In January 2019, Medici Living and Frankfurt-listed Corestate Capital Holding agreed to invest €1bn (US$1.1bn), split equally between equity and debt, in what is essentially a co-living development platform, targeting investments in the European co-living sector over the next three to five years. Also in January 2019, Medici Living agreed with W5, the family office of Ralph Winter (founder and 17% shareholder in Corestate Capital, and existing investor and board member of Quarters), to commit US$300m to a three-year expansion programme in the US.

Under the agreements, Quarters plans to add 6,000 beds to its portfolio in Europe, working with Corestate, and 1,300 beds in the US, working with W5. The acquired properties will comprise a series of retrofits and new construction, with Quarters taking care of the design and operation of the properties. Schmidt explains that Quarters used to operate an asset-light model, taking out ten year leases with five-year options. However, as Schmidt explains: “There were lots of developers who were excited about co-living, but they needed exits after completing their projects. We figured out that we could be the exit for those developers; other developers also need equity to make deals happen in the first place. Now, we can work with every developer - that is what these financing agreements are for.”

WeWork-style opportunity

Schmidt compares the opportunity in co-living to the situation in co-working. “There are lots of players already and more coming. It’s not a winner-takes-all situation, but there is an opportunity for one to rise above the others, in the same way that WeWork scaled up early. In the next 12 months, there’s an opportunity to create the WeWork of co-living - ten, twenty or thirty times larger than the next competitor.”

Of course, WeWork itself may have its own ambitions to become the ‘WeWork of co-living’, through its offshoot WeLive, launched in 2016. But in the US, Schmidt see Quarters’ serious competitors as Common - currently present in six cities, with 22 homes and over 600 ‘members’, and Ollie, present in four cities. In the UK, one competitor includes The Collective, which provides 546 rooms at its one property in north-west London. Quarters’ investment programme in the US will target over ten cities, adding to its current presence in New York and Chicago, while in Europe it will add cities in Austria, Switzerland, Spain and Poland to its current target markets of Germany, the UK and the Netherlands.

Which cities to focus on, says Schmidt, depends on where the greatest ‘pain’ is. “The problem that we are solving is that housing prices have increased and people can’t afford it,” explains Schmidt. “We provide the most affordable, standardised product at a price 10% to 20% below studio prices. Where’s the biggest pain? In major cities in the US and Europe. A good data point is a rising tech sector, but that’s not necessary.”

Co-living vision

Quarters will be adapting to different perspectives on co-living - such as increasing bathroom density in the US, and also providing female-only housing. At present, Quarters is targeting millennials only. "But the vision is much bigger. I think in life cycles,” says Schmidt. “My approach is not generation-based. It’s about what situation they’re in. My vision is to create co-living for families and for elderly people - a long-term solution. I want the contract you sign with us to be the last lease contract you ever sign.”

Residential real estate and co-living will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt.
 
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