Co-living arrangements can be part of the solution to the housing affordability crisis and shortages in the rental market.
But there are many challenges to be resolved before this becomes a mainstream asset class.
Co-living involves unrelated residents sharing a property. In some cases, residents have self-contained accommodation within a property. In others, residents have their own bedroom and share living spaces.
However, only one owner can own the property-it’s not possible under current rules to buy a share in a co-living property.
The model could be applied to a range of different living arrangements-millennials struggling with the high cost of living near CBD centres, travellers looking for short-term accommodation, migrants, downsizers and empty nesters.
The co-living market underwent a shake-up recently after the exit of Hmlet, a global co-living property manager. Local co-living operator and property manager Revelop has resumed management of its coliving properties that were leased to Hmlet.
Another operator, Dash, has agreed terms with the landlord to take over a co-living building in the Sydney suburb of St Peters that was previously managed by Hmlet.
Revelop director Anthony El-Hazouri says the group has developed significant capability to lease and manage the Hmlet portfolio internally.
“We have resumed control of our properties and offered Hmlet tenants the opportunity to stay on and lease direct with Revelop-our team has been in constant contact with tenants and the liquidators.”
Revelop will take on head leases, which El-Hazouri says provides certainty of returns akin to the general commercial asset class.
Covid has not been kind to the co-living sector thanks to social distancing.
Co-living is also a model routinely used for student accommodation. But, with borders closed, there has been a substantial drop in demand from overseas and interstate students for any accommodation.
“The pandemic has tested the co-living sector globally and I believe the dust is yet to settle,” says co-living industry specialist Chrystan Paul.
“The tailwinds for co-living are underpinned by a global workforce seeking mobility and flexibility. Without international migration, investors are likely to adopt a wait-and-see strategy.
“Borders re-opening will be critical for the co-living sector to regain momentum in Australia, and I envision it will be a few years before we go back to pre-pandemic conditions.”
El-Hazouri says smart operators will use the time to consolidate, build their presence and base so when borders reopen, they are positioned to capitalise on forecast medium-term undersupply.
Regulations encumber co-living
But Covid-influenced market dynamics are just some of the challenges the co-living sector is facing.
In NSW, the state government has officially released the proposed new Housing Diversity State Environmental Planning Policy, which covers coliving.
Critics have lambasted the proposed new SEPP on a number of points.
“In its current form, the proposed SEPP will do more harm than good for the co-living sector in NSW,” says Paul.
“The proposed SEPP makes new co-living developments prohibitive in face of the high cost of land in Sydney.
“Ultimately, we have to accept the new SEPP and try to adapt.
“I would like to see NSW planning allow co-living developments in new zonings such as BS (business development) and B6 (business corridor). This would allow co-living across a larger selection of sites and help to counteract the high cost of land in Sydney.”
Small is Beautiful property developer Ian Ugarte is similarly critical of the policy in its current form.
“The existing SEPP allows for a minimum of six rooms in a co-living arrangement,” says Ugarte.
“It excludes co-living developments in low-density areas. In effect, that means the NSW government only wants developers to invest in co-living properties.
“It prevents mum and dad investors who own residential property in low-density residential zones from developing their asset as a co-living property.
“If governments want to make a dent in rental shortages and fix housing affordability, they need to make it easier for mum and dad investors to invest in co-living developments
Ugarte also wants co-living planning rules relaxed.
“Rather than requiring council approval for co-living developments, setting a minimum of six rooms as a starting base and shunting these developments to
high-density areas, we should flip this policy on its head and set a maximum number of rooms or occupants, ideally five rooms or six people, and require approval by a private certifier, rather than a full development application.
“This would remove red tape around co-living arrangements and bring them to market much quicker.”
Turning Covid lemon into lemonade
Although Covid has hammered the co-living sector, it has also produced opportunities, Paul says.
“Patient investors have a window to acquire assets impacted by the pandemic such as underperforming hotels and serviced apartments to convert to co
living,” he says.
” I use the term patient because investors need to accept lower returns until the market returns to pre- pandemic conditions.
“Certain assets may also be repositioned back to short-stay accommodation once the hotel market recovers.”
The pandemic has also created an opportunity for developers to acquire commercial office or hotel sites to develop co-living schemes from the ground-up.
Once Covid is managed, the underlying fundamentals for co-living remain attractive.
“Co-living in major Australian cities will continue to exist and cater to· those seeking flexible accommodation, particularly once migration fires up again” Paul says.
“I see co-living in Sydney and Melbourne filling a much needed gap between student accommodation and the traditional rental market.
“I expect the co-living sector to recover in line with the return of international students and expats to Australia.
“I also expect investor interest to be reignited once the pandemic settles down.”
Ugarte agrees the base case for investing in co-living remains strong.
“Co-living properties are in high demand, with almost zero vacancy rates. When Covid hit, many people realised they had insufficient savings to buffer the
storm and were less able to pay rent on a whole house and needed something more affordable.
“People are also looking to avoid the social isolation of living by themselves and that leads them to seek out more communal, co-living arrangements.”
Maturation of the market
Compared to many overseas markets, the Australian co-living sector is in its nascency and there are plenty of opportunities to broaden use cases for co-living.
Ugarte says novel approaches to co-living are already in place overseas, such as properties that co-mingle older and younger people, could work in Australia.
“Students receive a rent reduction if they spend time with older residents,” he says.
“They are buddied up and live in the same house, but have their own separate, private areas.”
Co-living workspaces integrated into the co-living home spaces is another model being explored
overseas that could arrive in Australia.
“You might have a communal, multi-purpose meeting and living area, as well as nooks people can use to
work or relax,” says Ugarte.
PRD Real Estate chief economist Diaswati Mardiasmo agrees there are lots of different co-living applications beyond student accommodation.
“In the UK and US you see multi-family, co-living arrangements to create a village feel,” Mardiasmo says.
“Co-living could also become popular for digital nomads.
“Outsite is a specialist in this space. We’re also seeing co-working and living spaces for creatives where they can share skills and networks spring up. Sun and Co in Spain leads this space.”
Short-term co-living is another emerging model. For instance, at KoHUB in Thailand, residents stay monthby-month and packages can include daily meals and leisure activities.
Bendesk in Spain allows nomads and travellers to stay for as little as a week.
Revelop director Anthony El-Hazouri says not all overseas co-living models are suitable for Australia.
The business is in the process of launching WeHome, its boarding house and smaller accommodation brand. Under Revelop’s model, residents live in a self contained space and have their own appliances such as a washer, dryer and refrigerator. Living spaces are shared.
“Micro apartments are popular overseas. These properties are similar to our boarding houses, just on a much larger scale, with hundreds of small apartments in one complex.
“We don’t think this is a model that should be emulated in Australia. We think 50 boarding rooms max is plenty.
“The smaller the better in some instances because these developments need to be integrated into their locality”.
El-Hazouri also rejects any proposal for boarding houses and their ilk to be administered by social housing providers.
“That could reinforce negative connotations around boarding houses in the public’s mind,” he says.
“This could make it harder to get development approval for accommodation of this type, which will only lead to a reduction in the availability of boarding houses.
“The focus needs to be on making sure we build properties we want to live in ourselves.
“Although a co-living space may be small, it needs to be efficient, well lit, well ventilated and with high-quality finishes. Communal spaces should also be liveable but you shouldn’t have to use that space to undertake your day-to-day activities.”
There is much to be worked through before the future shape of the co-living sector is known.
It may also be an accommodation model that is suitable for future pandemics, given co-living allows groups to quarantine together and provide emotional and social support to each other. Co-living may also provide a solution to the shortage of rental properties on the market because more renters may be accommodated in suitable apartments.
Only time will tell how the future of this sector plays out in the market during Covid and beyond.