The Collective’s decision to appoint JLL and Savills to review options for its Old Oak scheme – after the sale to Newham Council’s Red Door Ventures was thrown into doubt by the election of Newham’s new mayor Rokhsana Fiaz – raises important questions for the market.
As the first completed co-living scheme to hit the market, The Collective Old Oak was viewed as a litmus test for investor appetite for the nascent sector. The agreement at the end of last year to sell the property to Newham Council’s private development company for about £120m suggested investors were willing to pay top dollar.
However, if Fiaz does pull the plug on the purchase and the agents are forced to seek out new buyers, the benchmark set by the Red Door Ventures bid could well have to be re-evaluated.
Such a move would also underscore the growing influence of left-wing group Momentum, which backed Fiaz and is threatening to derail another major property deal in London: the £2bn Haringey Development Vehicle (HDV).
So how much appetite really is there for co-living investment – and how fearful should the industry be of Momentum?
The emergence of co-living properties, where residents live in small rooms that often feature just a bed and bathroom but share living space, has certainly piqued the market’s interest.
Testing the water
Old Oak officially hit the market in June last year. Much speculation and secrecy surrounded the bidders, with Red Door Ventures the only name to emerge from the process when it agreed to purchase the scheme in December.
The industry is split on exactly how attractive The Collective Old Oak and other co-living schemes are to investors.
A recent report published by JLL found that the rising popularity of city centre living, a lack of affordable options and a growing trend for accommodation open to students as well as other renters were helping to drive demand.
“I think it is fair to suggest that there are a few billion pounds of firepower available to the sector, connecting those investors in the student market keen on direct-let accommodation and those that are specifically targeting the co-living sector,” says Simon Scott, head of investment residential capital markets at JLL.
“Old Oak is something of a pioneering first and is a test for the sector”
Chris Lacey, Lacey Capital Partners
Chris Lacey, managing director of Lacey Capital Partners, agrees that co-living schemes offer a lot of investment potential and would appeal to institutions.
“If it is designed, built and managed well, co-living should be an affordable and attractive alternative to an enormous market of renters,” says Lacey.
“An investment product like this will be well sought after by a wall of global institutional capital looking for income and long-term investment assets.”
He adds that The Collective Old Oak has “some value-add angles and good potential”. However, he notes, potential investors have to weigh up a number of uncertain variables that make the asset difficult to price.
“Old Oak is something of a pioneering first and is a test for the sector. It is a tough call for any investor and perhaps particularly for a public-sector-backed purchaser,” he says, adding that a dearth of comparable sales data makes it difficult to decide where the yield should sit.
“It is certainly not as simple as assuming that the yield for co-living is or should be between build-to-rent and student yields because these, particularly student, are mature markets,” he elaborates.
“The sustainability of demand for co-living, the rents and the net operating income are all tricky to forecast.”
Lacey suggests the valuation risk should be accounted for by offering investors higher yields to compensate for the risks they face.
Timeline The Collective Old Oak
- 2010 Reza Merchant comes up with the concept of The Collective
- May 2016 The Collective opens its scheme at Old Oak
- May 2017 The company announces that the development is up for sale and that it is looking for bids in excess of £100m
- December 2017 News emerges that Red Door Ventures has been selected as the preferred bidder for the Old Oak scheme
- March 2018 The Collective instructs agents to review its pricing and investor options after the sale to Red Door stalls
Adding to the uncertainties are conflicting local authority planning policies. A lack of cross-borough consensus on whether it is acceptable to build units that are below minimum space standards is another issue for potential investors. What is accepted by one council is not by another. Also, without a clear line from central government on its stance towards co-living, investors fear that public sector opinion could turn against such schemes.
Yet another challenge is that co-living does not have residential use classification, which could make schemes harder to sell as investors looking to sell would not be able to carve buildings up and sell off individual units; they would have to sell them in their entirety.
On the plus side, government support for co-living does appear to be growing. The draft London Plan made mention of the asset class as an alternative to student accommodation, which JLL’s Scott believes was a major boost for the sector.
“The draft London plan effectively suggests that all purpose-built student accommodation without a university commitment will be treated as co-living, or purpose-built shared living schemes as the plan describes it, which adds further credibility and recognition to the co-living market,” he says.
Another very different political issue has emerged from The Collective’s attempted sale of Old Oak: the growing role of Momentum, which takes a hard line on housing issues.
In Haringey, the left-wing group threatens to derail the HDV, one of London’s biggest public-private partnerships. Last November, Labour councillors supporting the scheme were deselected from the list of candidates for this May’s local government elections by local Labour Party members following a campaign by Momentum.
Then in February, the future of the scheme was thrown further into doubt when council leader Claire Kober announced she was stepping down.
Just a month later and The Collective appears to be in danger of suffering a similar fate. Fiaz, Newham’s new mayor, is backed by Momentum and is reported to be less than enthusiastic about Red Door’s purchase of The Collective Old Oak. She is believed to be more in favour of building council homes in Newham.
A senior source who wishes to be remain anonymous says political battles like the one seen in Haringey always spread to other boroughs, and that is what we were seeing now in Newham.
The fear is that Momentum will gain more ground in the upcoming local government elections next month leading to more political clashes with the industry.
“The issue is: after May what happens if Momentum is in other London boroughs,” Chris Wood, group director of housing consultancy Altair, told Property Week after Kober stepped down in Harringey in February.
An end to the Red Door acquisition has not yet been called, but with the council now in purdah, The Collective has decided not to wait until after the elections to review its options.
Will Red Door get the green light or will another party swoop in and drive a harder bargain? Or is appetite for co-living not quite what it has been cracked up to be? Time will tell.