Real estate is one of the fastest-growing sectors, viewed with caution by investors
We recently signed a EUR 3.95 million financing agreement for the new co-living complex Youston in the Latvian capital, which will be financed by BigBank. While this may seem like run-of-the-mill news, the situation was actually quite different not so long ago. Co-living projects were viewed with scepticism not only by banks but also by large investors, and developers were scrambling to find alternative sources of funding. So what's changed?
The co-living model, previously viewed with caution by banks and investors due to its high tenant turnover and novelty, has now gained traction across Europe. According to a survey conducted last year by the British real estate company Savills, 51% of major European real estate investors are planning to invest in this type of housing development by 2026, with an estimated investment amount of EUR 2.6 billion.
In Europe, the co-living model has been expanding rapidly in recent years as an alternative to traditional renting, reflecting the changing values of residents and the needs of urban infrastructure. The pandemic has accelerated the growth of this type of housing.
The co-living model appeals to residents because it offers an affordable way to live in the centre of a big city, and the opportunity to live in a community is becoming increasingly important in the face of the world’s growing loneliness epidemic. Meanwhile, investors are attracted to this type of housing development because of its outperformance of the traditional rental market.
Savills data shows that in major European cities, co-living projects provide a return on investment of between 6 and 9%, while the average return on investment in the traditional rental market is 4-6%.
Investors are also drawn to the occupancy rates of co-living projects, which have become well established in recent years, reaching 90% in many European cities, and as high as 95% in megacities such as London and New York.
Fastest growth in Europe’s major cities
In our region, this type of housing is still relatively new, with KAITA Group managing three co-living projects in Vilnius, while the new 174-unit Youston project in Riga, which will open in April, will be one of the first for the neighbouring capital. However, in Western Europe, the co-living trend started in 2004 and is now one of the fastest-growing areas of real estate.
This is due to several factors. In particular, it is estimated that by 2030, almost 9% of the world’s population will live in just 41 megacities. Such urbanisation requires new solutions to make living more convenient and less dependent on transport. Converting office and commercial buildings in the city centre into co-living spaces is one such solution.
The United Kingdom remains the co-living capital of Europe, with the co-living market growing rapidly as of 2019 and 31,000 co-living homes in 2023. Cities such as Manchester and Glasgow are also increasing the supply of co-living to meet housing demand in regions outside London. France, Spain, and Germany have also seen a rapid expansion of co-living in recent years, and in Paris, the return on investment of this model is already around 4%, surpassing the average return on traditional rentals in that city (2.3%).
It is estimated that there are currently around 56,000 co-living homes in Europe, with another 75,000 under development. This is still a small fraction compared to the 65 million units of traditional rental property. The potential for co-living development thus remains enormous, which explains the investors’ ambitious plans for the future.
Gaining popularity for affordable place of residence in city centre
Last year, a study conducted by the Urban Land Institute, an international network of real estate developers and experts, revealed the key drivers of growth in the co-living sector in Europe.
The main reason is rising house prices in major cities, especially in the central parts of cities. Co-living gives young people the opportunity to settle in a convenient location at an affordable price. In addition, younger generations, who value experiences over possessions, are choosing co-living as a way to live in community. Remote working and the growth of freelance culture are also increasingly opening up opportunities. For those who want to travel, co-living spaces offer temporary, affordable, and comfortable accommodation.
Finally, the much-discussed epidemic of loneliness also plays a significant role: shared spaces close to private dwellings make it possible to find oneself effortlessly in a community, amongst like-minded people. We observe the same trend in our co-living projects in Vilnius and Prague: young professionals, most of them foreigners, tend to settle here.
The growth of the co-living sector also shows its environmental potential. This is also attracting the attention of both investors and a younger generation increasingly interested in sustainability.
It is estimated that co-living projects can reduce CO2 emissions by up to 32% compared to individual dwellings, especially when developers consciously invest in sustainability solutions in line with the trends of modern society. For example, one of our co-living projects in Vilnius has a BREEAM In-Use Excellence certificate, is recognised as the most sustainable co-living project in the Baltics, and is one of the top 15 best rated buildings in Lithuania.
Banks’ attitudes are also changing
As co-living housing started to gain popularity, banks were rather cautious about this type of property due to the lack of data for a completely different type of property, which is much more short-term rental. Developers have looked for alternative sources of funding, including crowdfunding platforms. However, attitudes are changing: names such as Barclays, HSBC and Nomura are now actively funding new co-living projects, reflecting a changing perception of the model’s sustainability and profitability.
Author of the commentary – Ugnius Latvys, Head of Property Development Company KAITA Group