Pre-pandemic, coliving and student housing were two of the hottest property asset classes, with increasing institutional investment attracted by the income- generating qualities, and rising demand sparked by the reliability of the cash flows the sectors provide. 

According to JLL, global funding in the coliving space has increased by more than 210% annually since 2015, totalling more than $3.2 billion by mid-2019. Purpose-built student accommodation (PBSA), on the other hand, saw a global investment volume record of $16.3 billion in 2018 alone, says Knight Frank.  These numbers were expected to grow considerably in the near term as Blackstone bought iQ Student Accommodation for $6 billion at the end of February 2020 and DTZ Investors and The Collective launched the coliving fund - COLIV - in October 2019, seeking to raise 650 million pounds ($825 million) from third- party investors to buy or forward-fund coliving assets in London with a target gross asset value of 1 billion pounds. 

However, the COVID-19 outbreak brought some unforeseen circumstances. Lockdown, travel restrictions and social distancing measures put coliving and student housing in a delicate position. So, what has been the effect of the pandemic on the market? Are coliving and student housing resilient asset classes? To answer these questions, I interviewed Christian Birrell, DTZ Investors Coliving Fund Manager, Nick Barker, director of Gravis Capital Management and co-lead manager of the GCP Student, Samuel Vetrak, CEO of BONARD, and Stonington Cox, Founder & CEO of Nomos Group Holdings, in June 2020. Their insights were also supported by industry reports and news articles.

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Investments On Hold 

Real estate investment activity has dropped with the pandemic. As pointed out by JLL, practical challenges such as travel restrictions and uncertainty around valuation are limiting investors’ ability to conduct due diligence and close deals; coliving and student housing are no exception. The stall in investments did not come as a shock to Birrell: ‘Unsurprisingly when the pandemic arrived, investors were not deploying capital, not because they thought [coliving] was not defensive, but there are lots of problems in their own existing investment bucks, so everything kind of went it on hold’.

Despite the reliance of PBSA on international students, Vetrak has not seen ‘panicking or divesting from the asset class’, as investors remain confident in student housing in the long term. Barker, however, acknowledges the momentary uncertainty: ‘Student housing investors are feeling nervous about whether the academic year starting in September/October 2020 will start as normal, or be delayed or moved online. I believe they are mostly looking for reassurance that students will be returning to campuses and that student housing will resume being income generative’. 

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Strengthening Fundamentals 

Non-cyclical factors such as urbanisation, shrinking households and soaring house prices have been some of the drivers of demand for rental assets, as pointed out by Savills. In this period of uncertainty, however, this trend might intensify further, as consumer confidence in housing falls, and there is even less mortgage credit availability.

‘The fundamentals have strengthened’. This bold statement from Birrell regarding the coliving sector is explained by the current mass experiment of working from home in which people are reassessing where, how and with whom they live. As a result, this could lead to more demand for coliving as operators are enhancing hygiene standards and creating excellent work from home setups. Cox also believes that the fundamentals are strong for coliving: ‘There is so much missing product for people living in large cities that make $70,000 to $120,000 a year that even if the demand drops by a bit due to the turbulence in the economy, there is still such a demand-supply mismatch that I think the fundamentals for coliving continue to be very very strong’. 

As for student housing, some fundamentals have stayed the same. ‘Interest rates are low, there is a lot of liquidity in the market, and the imbalance between offer and demand remains’, said Rainer Nonnengässer, CEO of International Campus, in a webinar hosted by Real Asset Investment Briefings in April 2020. To Vetrak, past experiences showed that during or after an economic crisis there is an increase of students, as the saying goes ‘when the economy is good, people want to study; and when it is bad, they have to study’. 

From the UK perspective, Barker says that ‘The fundamentals for student accommodation have not changed with COVID-19, we are still going to see demographic trends supporting the sector from this point onwards including the growth in the number of 18 years olds in the UK’. Another important observation made by Barker is that ‘the importance of international students to the future of UK higher education is now recognised and accepted by the government’. This understanding can be illustrated by the appointment of Sir Steve Smith as the first international education champion, announced by Michelle Donelan MP during a British Council webinar in June 2020, and the introduction of the 2-year post-study work visa for international students, released by the UK Government in September 2019. 

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Opportunity: From Flipping Hotels To Courageous Ambition 

While some investors are now looking for plots of land coming to the market, others are planning to repurpose distressed assets into student housing or coliving, Vetrak explains. Indeed, according to Birrell, the next acquisitions targets for the COLIV fund have changed in the short term to ‘focus on development projects’, as construction activity is operating efficiently in London. In Hong Kong, however, distressed hotels seem to be in the sights of investors for conversion to coliving use, as according to Jim in a Reuters article, Warburg Pincus-backed Weave is looking at boutique and budget hotels to fulfil its expansion target, and Oootopia (owned by Arch Capital) is keeping its eyes open to bargains in the sector. 

Beyond the encouraging dynamics on the demographic side, Cox sees an opportunity for courageous and ambitious investors to dive into real estate investments in coliving before institutional capital floods the market, compresses yields and drives values up. On a spectrum of investors ranging from most risk tolerant on one side through to most conservative on the other, i.e. venture capitalists all the way through to institutional investors, Cox believes that those in the middle of that spectrum - private equity, family offices, and fund of funds - are well suited to continue to prove out the concept. ‘People with flexible capital that are comfortable taking a bit of risk in the early stages of a sector’s evolution should be able to make outsized returns as a result’, he says. 

According to Savills, the opportunity for student housing now lies in markets with demand and supply imbalances that have less dependency on international students such as Spain, the Netherlands and Ireland. The recent purchase of Emilia Pardo Bazán, a 302-bed PBSA property in Madrid, by Global Student Accommodation Group (GSA) illustrates that opportunity. ‘This acquisition strengthens GSA’s position as the PBSA provider of choice in Madrid, underpinned by the resilience of the higher education sector and the supply and demand imbalance of quality student accommodation’, said Nicholas Porter, Chairman at GSA Group, in Property Funds World. 

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Pulling Back The Blinds 

As the pandemic is putting social risks in the spotlight, investors might look with closer attention to the challenging S factor of Environmental, Social and Governance (ESG) indicators. And coliving and student housing are especially well suited to deliver: ‘Focus on Environmental & Social Impact investments may change post pandemic, with investors now recognising that management strategies that focus on looking after tenants’ mental and physical wellbeing should get equal recognition as impact investments that focus on the environment. Unlike traditional real estate investments, coliving investments give investors the ability to positively enhance the lives of their tenants, whilst having positive environmental impact through facilitating the sharing of goods and resources’, Birrell says. Enhanced cleaning protocols and the offering of a wide range of virtual events are some of the measures operators such as The Collective, and iQ are taking to address the safety and wellbeing of their members. 

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The Verdict 

Regarding the resilience of coliving, Cox is emphatic: ‘Coliving is both resilient and defensive. The data we are seeing suggests that it may be even more resilient and more defensive than traditional apartments, which have traditionally been among the most resilient and the most defensive of the real estate sectors’. This resilience is illustrated by the delinquency rates in recent months, which for coliving have been surprisingly low. As an example, Cox mentions that in the Common portfolio, delinquency was less than 5% in April 2020, whereas, across the market in the US, it has been as high as 20% for apartment buildings throughout the crisis, according to the National Multifamily Housing Council. 

According to Barker, ‘The student housing sector has responded very fairly on the whole to the circumstances faced by its residents and I expect that students will look favourably on the sector as the world starts to ease lockdown’. Vetrak also remains bullish on the sector’s future, saying ‘Student housing is still a maturing asset class offering better returns and yields than other, more mature asset classes such as office, retail or hotels/hospitality. It is a combination of defensive, countercyclical, established and transparent asset class, with enough volume and high returns that makes it very well-positioned during and post COVID-19’. 

Student housing and coliving are reinventing themselves as they strive through the pandemic. From new ways of marketing, leasing and operating, to a push into embracing technology and digital tools even further, the current situation will have long-term effects on the evolution of these sectors. The economic downturn and the affront to social interaction and density brought by COVID-19 has constituted a crucial moment where the survival of the fittest may prove once and for all the resilience of these asset classes not as pandemic-proof, but pandemic-ready.