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On 2nd March, real estate leaders, including investors, lenders, developers and operators, met at Greystar’s Be Casa Rivas in Madrid to discuss investment opportunities in Co-Living, an asset class that has seen great success over the past three years.
The atmosphere at the club meeting was one of intrigue for the new asset class, and attendees at the event drew comparisons to other sectors to understand how it might function and what one could expect in terms of obstacles, risks and profit. Comparisons were drawn to the Student Housing sector and co-working spaces, particularly with the services and amenities that Co-Living offers, as well as the aim of creating a community.
Co-Living was also a hot topic at the Women in Real Estate club meeting in the UK at the end of February. Read the takeaways from this event: Co-Living, Life Sciences and Data Centres: The Future of Real Estate’s Asset Classes with WIRE.
Many expect the demand for Co-Living to be concentrated in the 23-40 age group. However, the real demographic appeal seems much wider, with interest from the elderly and students.
One interesting subset of this demographic is B2B clients, as corporations find temporary accommodation for travelling employees. This is a stable income stream, but not necessarily long-term. However, it is a good opportunity to convince those employees to stay for longer contracts if they remain in the area.
In the context of Madrid, like many large European cities, there is a low amount of residential product for rent, and what is available is often poor quality, expensive and lacks the community aspect. This makes new Co-Living accommodations all the more appealing.
In the future, some see the potential for separating the demographics into separate buildings and products. It is important to understand these demographics and think carefully in the development and operation stages in order to integrate such different groups and create the desired communities.
Operators are important pieces of the Co-Living puzzle:
The current market circumstances make financing tight for everyone, so Co-Living is not unique in the struggle to find capital - banks in particular are hesitant to lend in risky areas, particularly without the asset class being established for several years. Having exit strategies were mentioned as an important factor for institutional investors to start contributing their capital.
Over the past few years, this asset class has been more popular with alternative financers. However, several banks, including those internationally, have expressed interest recently. Due to how new the asset class is, the biggest questions and concerns arise due to a lack of track record - there is a need to prove stable occupancy levels and high rent yields.
Banks are often more comfortable with Student Housing and Care Homes as short-term residences, but these sectors can be used as comparisons for Co-Living in order to incentivise involvement. One needs to make clear and fully explain the whole landscape and make that information to get banks and stakeholders on board.
SeanPavone | Envato
Bank attendees at the club meeting stated that while they wait for Co-Living to build its reputation and get results, they can be there for refinancing alternative lenders and for the exits.
- The need for Resi is clear everywhere, but the main issue is how stable the cash flow can be, and banks tend towards conservatism.
- The duration of time it takes for an asset class to develop or stabilize will affect the ability to refinance or exit, and that will have an impact on the amount of leverage that can be applied.
- Many have questions about what is the alternative if the products don’t work as planned. However, reconversions have been proven to be possible, with some difficult assets being converted, e.g. in the UK.
- Developers and owners still believe that once the end user is identified, everything else can be solved through adequate underwriting and the creation of the right product with the right units.
A key concern for financers, as well as operators and owners, is the legality of this asset class in Spain, particularly concerning how new it is and whether the government and individual town halls are on board with its development.
There is no doubt that everything currently under development is in compliance with the country's legal guidelines regarding short-term accommodations. There is a possibility that this will evolve, and it is important to educate everyone so they understand what Co-Living is, what its purpose is, and how it works so that in the future owners and developers can work with regulators, rather than against each other.
Madrid is noted as a pro-business location that also appreciates the need for temporary and rented accommodation due to the current lack of supply and increasing rents. Each town hall may make a different decision in terms of future regulations, but most appear to be positive and cooperative, and many assert that this asset class can be regulated in different ways such as shared, temporary, or short-stay accommodation.
Ultimately, Spain will see elections this year, and this change in governance may have an effect on these regulations for the negative. Next year, the residential market is predicted to stabilise, and institutional financers will be able to understand the market further and make more certain decisions.
Developers are key for getting projects such as these off the ground, due to the sheer size of the buildings and the land requirements.
Hospitality read: A Guide to the Hotels in Southern Europe.
Overall, Co-Living is seeing real results in Europe. Rates are ahead of underwritings significantly, and projects are seeing high demand and success in the number of rooms rented, with contracts trending longer-term.
As there are operational and successful projects in the USA and UK, they can be used to simulate demand and operations for investors who are still hesitant to get involved in these projects. Nevertheless, many will still need to establish a solid track record before many conservative banks will be willing to deploy capital in this area.
Discuss up-and-coming asset classes and hospitality at España GRI 2023 on April 24-25 with leading investors, developers, and owners from Spain and beyond.
Written by Sarah Garnett