Investment opportunities in the UK real estate market: challenges and the rise of co-living

29 November 2023 / Insight posted in Article

The UK’s real estate market has long been an attractive investment option for investors and developers and the under-supply, in the living-sector specifically, presents opportunities for investors and developers who could potentially benefit from these gaps in the market. However, several key challenges hinder their ability to seize these opportunities.

a) Cost of capital: the cost of capital, particularly debt financing, has risen to levels that might be considered expensive compared to what the market has been accustomed to. This situation necessitates a larger equity component to make real estate deals financially feasible.

b) High construction costs: construction costs remain relatively high, making it challenging for developers to undertake projects that generate satisfactory returns.

c) Stagnant Gross Development Values (GDVs): the GDVs, which represent the end value of a development project, have not risen sufficiently to offset the increased construction costs and the higher cost of capital. As a result, the profitability of real estate projects has become more elusive.

d) Cumbersome planning system: the UK’s planning system has often been criticised for its inefficiency, leading to delays and even the abandonment of projects. The complexities of navigating the planning process can slow or prevent real estate ventures from getting off the ground.

Despite the challenges posed by the current state of the UK real estate market, there is a promising segment of the living-sector that could see substantial growth – co-living. Co-living spaces have gained traction in recent years and offer unique advantages that appeal to both residents and investors.

a) Addressing the housing crisis: co-living spaces can fill a significant gap in society, especially for young people who are often priced out of buying or renting quality properties. These communal living arrangements provide affordable and high-quality accommodation, making them an attractive option for many.

b) Combating loneliness: studies have shown that despite the high level of online connectivity in today’s society, younger generations are experiencing increased feelings of loneliness. Co-living spaces offer a solution by creating a sense of community and connection among residents. This social aspect can help combat the isolation many young people experience.

c) Multi-generational living: co-living spaces provide a unique opportunity for multi-generational living. They allow younger generations to live alongside and build connections with older generations. This intergenerational approach further fosters a sense of community and enriches the living experience.

d) Enhanced retention and rent resilience: the sense of belonging and community fostered by co-living spaces often leads to better tenant retention and rent resilience. When residents feel connected to both the property and its culture, they are more motivated to stay longer.

In the UK real estate market, there are notable challenges stemming from under-supply, rising costs, and a complex planning system. However, these challenges also present opportunities for innovative solutions, with co-living emerging as a sector with significant growth potential. Co-living addresses housing affordability and social connection, making it an appealing choice for both residents and investors. As a result, co-living ties into the social aspect of the ESG agenda which is a vital part of any real estate business. As the real estate market continues to evolve, those who adapt to changing dynamics and seize these opportunities stand to benefit from this ever-evolving landscape.

Guy Richardson, Head of Real Estate and Construction, recently spoke about co-living on a panel discussion at ExpoReal in Munich, which proved a popular and thought-provoking topic. As real estate and construction specialists, we support our clients through a multitude of issues like those mentioned above. We also advise clients on their ESG reporting and you can find out more about ESG in the real estate sector here. If you’d like to discuss any issues you are facing as a investor, developer or construction company please get in touch.

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