According to Savills, about half (51%) of European investors plan to invest in co-living developments in the next three years, and, compared to 2022, co-living projects are where investor interest has grown the most. Market players, including Lithuania-based investor Baltic Asset Management, see big potential for projects of this type in the Czech market as well. The company’s CFO, Dalius Kaveckas, shared his insights with Property Forum.
“Several long-term trends explain investors’ interest in co-living projects. Europe is undergoing further urbanisation as people move from smaller towns to key cities, so the need for housing is considerably increasing there. At the same time, rising housing costs and apartment acquisition prices in recent years have reduced housing affordability. Finally, workforce mobility among young talents who need quality living space to rent, has increased considerably. In such a market environment, co-living projects are an attractive alternative compared to owned housing and traditional private residential rental alternatives. That is sparking investors’ interest,” says Dalius Kaveckas, Chief Financial Officer at Baltic Asset Management, a Lithuanian company which is finishing up a co-living project in Prague’s former Vitkov Hotel.
City dwellers are set to multiply
According to United Nations statistics, Europe will continue to see people moving from outlying areas to cities until 2050. Whereas 70% of Europe's population lived in cities in 1990, and 73% in 2014, by 2050 the figure is projected to reach 82%.
“That means another roughly 60 million people will be moving to cities, and they all need somewhere to live,” the Baltic Asset Management executive says. “But the affordability of housing in Europe is deteriorating. The Czech Republic has a situation where housing affordability is among the worst in Europe. According to the Deloitte Property Index, it takes 13.3 gross annual salaries to buy a 70-square-metre apartment in the Czech Republic. For comparison, in Belgium, Denmark and Italy, 4 to 6 years’ salaries are enough, while in the U.K. and the Netherlands, it takes 7 to 7.5 years of earnings. People who can’t really afford to buy housing are forced to look for alternatives. On top of that, the Czech Republic has faced a sharp decline in housing supply in recent years due to increased requirements and long, complex building permit procedures,” Kaveckas says.
He notes that co-living projects are becoming more attractive to young professionals and students than renting traditional housing because they provide more value and flexibility. Analysis by Savills in the UK found that, in terms of the value received, living in a co-living property is about 20% cheaper than living in a private residential apartment.
“With traditional residential apartment renting situation, you need to factor in extra costs for various services like internet, TV, other services. In co-living projects, all that is already included in the rent – from internet services to a shared gym which is free for co-living residents. So, when you add it all up, co-living is a much more competitive alternative,” Kaveckas explains.
Young talent is migrating
Baltic Asset Management’s executive notes that co-living projects especially appeal to two categories of people – young professionals and students.
“In Europe, we are seeing growing mobility among young talents. The Czech Republic is no exception. The Czech Association of Business Service Leaders calculates that over the past decade, the number of shared service centres has grown by 150, and the number of people working in this sector has surged from 50,000 to 160,000. Today there are more than 400 such centres operating in Prague, Brno, and Ostrava. Many have a multinational workforce since young professionals from many different countries are coming to work there. Co-living is attractive to all of them because it offers not just a high-quality service but also many opportunities for socialising which has become even more important for young audiences after COVID-19 lockdown situations,” Kaveckas says.
As an example, he notes that the co-living projects Baltic Asset Management has developed in the Lithuanian capital of Vilnius have occupancy levels of 98%. The residents are young professionals and students from 42 countries. Both Lithuania and the Czech Republic are attractive places for young talent to go to work in startups and international companies. The IMD World Talent Ranking for 2023 confirms that: it lists Lithuania as the 23rd and the Czech Republic as the 21st most attractive international destinations for young professionals. Both countries are rising in the IMD ranking, suggesting that their co-living markets have growth potential, since talented young people tend to take good advantage of this attractive option.
“A large pool of young talented people is important for startup business ecosystems, multinational companies, shared service centres and other growing businesses. The presence of such a talent pool tells foreign investors that there is sufficient workforce potential here, which makes it an attractive place for investment. Thus, good and flexible living solutions help to attract talent, which in turn attracts investors,” says Kaveckas. “It's no coincidence that cities such as London, Amsterdam, Berlin, San Francisco and Seoul all have well-developed co-living markets.”
Besides young professionals, co-living properites are also relevant for students, especially those from foreign countries.
“In Prague alone, there are about 400,000 students, and 10% of them are from abroad. Co-living is very appealing to them, especially because traditional rental options are increasingly limited and focus on short-term rental opportunities. International students prefer institutional landlords, who offer stability, clear pricing, rental terms, and rules which protect their wellbeing,” Kaveckas notes.
The Czech market is attractive
Baltic Asset Management’s CFO stresses that the fundamental trends mentioned above, the country’s growing pool of young talents and the big potential of the co-living market make the Czech Republic attractive for investors. That is why the company chose it as a prime market for the development of co-living projects.
“At Baltic Asset Management, we have been developing co-living and traditional rental housing projects for 3 years. We have a portfolio of 600 housing units and what we consider a very strong product. We can offer excellent co-living space at a competitive price in the Czech Republic as well,” Kaveckas says.
The company is investing €14 million in its first project in Prague, which will be presented under the Youston brand. The intention is for tenants to move in starting in January 2024, though already at the end of November 105 rooms at the project became available for reservation.
“This will be our first project to enter the attractive Prague market. It is an important pillar in our effort to create growth and scaling infrastructure for co-living in the future. We have bigger ambitions: over the next few years we want to expand our portfolio in Prague to 500 co-living or traditional rental units,” the CFO says.
Growth through partnerships
Baltic Asset Management envisages investing €69 million in the Czech Republic in the coming years. The final amount, however, will depend on what business model is chosen for development.
“We are coming with a flexible business model. While our first project is being developed after acquiring the Vitkov Hotel, we are also looking for opportunities to operate through partnerships with property owners or investors. That’s why we are looking for potential partners – from institutional and private investors to real estate owners whose existing buildings would be suitable for a co-living project and, after conversion, could bring their owners a bigger investment return,” Kaveckas says.
He says that the company is especially interested in properties which could be converted to residential or accommodation use. Such an approach not only reduces the time of introducing the re-purposed property to the market but also brings benefits from a sustainability perspective. Residential buildings in Europe generate an estimated 11% of CO2 emissions. The conversion of buildings can reduce their environmental impact and at the same time give new life to run-down urban spaces.
Eyeing other markets as well
Besides the Czech market, Baltic Asset Management is also exploring opportunities in several other European countries where growth potential is substantial. That includes Poland, Sweden, the UK, and Latvia.
“All these markets are at different stages of development. In London, the co-living market is already well-developed and there is a lot of competition. But the city is growing and the demand for a range of living solutions is substantial. We believe that our distinctive co-living product would be competitive even on the London market,” Kaveckas says. “In Poland and Latvia, meanwhile, the co-living markets are less developed which presents a range of opportunities.”
Over the next couple of years, Baltic Asset Management would like to build a portfolio of more than 1,200 housing units across all these countries. Investments into that could total up to €112 million.
Savills, the international real estate advisory, forecasts that the co-living market in the countries of Europe will grow rapidly for the next 5 to 7 years. Baltic Asset Management’s ambition for this period is to reach at least 5,000 apartments in co-living and rental housing projects in different European cities. “We will pursue that objective through a partnership-based development approach,” the company’s CFO says.
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