Although housing affordability is improving, expensive markets like Sydney and Melbourne are still showing a high entry point relative to incomes and so we are seeing the housing market evolve with new options.
Build to Rent (BTR) is one area that’s received a lot of attention over the last few years and may soon be set to deliver some positive and sizeable developments. We may also see Federal and State Governments re-engage with the market more directly to provide greater incentives to first time buyers, even with ideas like shared equity.
However, market entry is still a major sticking point for many first-time buyers with around 9.1 times gross income now required to enter the market. As a result, the demand for long-term, secure rental accommodation, can soon be more readily achieved by the BTR sector, while others might well embrace the idea of modern and facilities rich co-living, or what’s sometimes described as new-age boarding houses.
With both these concepts it’s a re-casting of what the great Australian dream might be and for many that’s a matter of security, not always only focused on direct ownership.
Just Like Co-Working
On an international scale, co-working has become a major trend and now some of the market leaders are leaping onto the emerging co-living real estate movement and in Australia it’s also a trend that is appealing to private and professional investors.
Co-living offers a number of benefits, from housing cost relief to energy efficiencies. The concept of co-living like many other aspects of modern economies is the idea of the ‘shared-economy’.
While the format can be attractive to some investors there are two and somewhat related factors accounting for the new model of co-living, the first one is perhaps obvious economic, the other attraction is social and that can cut across varied demographics from the young to older residents, including people in their 60s.
From an economic standpoint, we’re dealing with an employment market with largely flat wages. Meanwhile, housing in most cities is very expensive and even more so in popular inner-city areas that are close to strong CBD employment centres.
From a social perspective, co-living offers convenience and flexibility and can also create community, but where there’s quality housing that’s also very secure with no long-term commitment.
Quality is very important and so the tag of new age ‘boutique’ boarding house will be very important to make the idea a reality.
While, because of shared services, co-living might look more expensive on the surface, most co-living new projects should be cheaper in terms of total dollars spent by the occupants. While they offer more flexible terms than standard leases and provide a sense of community with no long-term financial commitment via a mortgage.
There are parallels to other concepts such as boarding houses or university accommodation but, thanks to at least one developer, modern co-living has recently found a home in Paddington following an earlier project in Stanmore and Newtown, with Glebe and Randwick slated for 2020. These locations clearly show how quality and proximity are important.
Co-living spaces typically feature private rooms and large common areas, with lots of facilities that can also extend to Go-Get memberships. The prices are similar to market rent or even higher but include all utilities and internet, with flexible terms for both short and long-term stays.
Australia follows a trend where the concept has already taken off and is well-established in Europe, Asia and North America. Outside of Sydney co-living is soon expected to spread to new properties in Melbourne, Brisbane, Canberra, Perth and Adelaide.
The business of co-living
Most co-living spaces in Australia are governed by boarding house regulations. However, co-living could be a good opportunity for the emerging built-to-rent sector.
Overseas it is quite common for major developers and investment institutions to become landlords after construction, giving renters access to much longer leases and very professional management.
Current Australian tax laws hamper the build-to-rent sector, because there’s an incentive for developers to sell stock and recoup GST. Previous plans to reduce the tax on managed investment trusts in the BTR sector from 30% to 15% would help, bringing residential property in line with commercial property. Tax reform still remains very much at the heart of housing affordability and the newly elected government in Canberra is sitting on a backlog of 100 plus reforms to tax policy, although not all are directly related to housing.
Pros and cons
The ups and downs of co-living can naturally be viewed from both landlord (developer’s) and resident perspectives. Co-living’s chief benefit for investors is its ability to generate a higher yields per property than most traditional residential leases.
Downsides from the investors/developers perspective include high turnover, non-standard leases and expenses related to fitting projects with facilities for co-living purposes.
Facilitating a communal living experience and creating and organising programming are two additional hurdles, but with good management these are no such big issues.
From the occupant’s standpoint, the advantages look appealing and include flexibility, the ease of renting fully-furnished spaces, smoother, technology-enabled experiences and the possible chance to live alongside others of similar age, experience and mindsets. A big negative is a more compact home, comparatively higher rental costs by comparison to traditional apartments, and the fact that communal living may not be to your liking.
Any new co-living product is going to be competing against both traditional residential units and against existing market-leading co-living spaces.
So, it appears that developers will have to offer a differentiated product. However, we’ve seen this done before, and done well for student accommodation, it’s all part of a mature evolving market and creates new investment opportunities.
Like other aspects of the shared-economy today’s economic environment is ideal for co-living.
A serviced-focused employment market encouraging urban living, younger renters’ desire to try both communal living and flexible occupancy terms and an economy that is spurring developers to chase yields and absorb risk, all encourage co-living options.
As we seek different housing options, then co-living should continue to grow and with community, local and state government support make a solid contribution to the total housing market.
However, for co-living to escape the label of ‘boarding-house’ it’s going to have to appeal to a varied customer base, overcome the hang-over of its former demographic and survive varied economic cycles and conditions.