Co-Living Shrugs Off Stigma as Overseas Money Moves In

The co-living sector is evolving as international money moves in. The acquisition for $31.5 million of the Sydney Potts Point Central Apartment Hotel by Miami-based BGO Strategic Capital Partners and Sydney’s Hotel Capital Partners signals growing interest and a shift towards a more diverse offering in co-living. NSW director of the CBRE Hotels Investment and Brokerage team Tom Gibson ran the sales process, wrangling more than 70 apartment owners to bring the site to market. “Because the zoning at 15 Springfield Avenue could support alternative uses, we received widespread interest from domestic and international hotel, build-to-rent and co-living sectors,” Gibson says. “When you look at the location of the asset and the immediate surrounding amenities, co-living quickly became the focus. “Investors adopting an alternative strategy simply couldn’t compete against the competitive nature of the co-living sector buyers.” Not all conversions are equal Some conversions, such as office to residential, have proven tricky, although not impossible, as Australian Unity’s redevelopment of its offices into co-living-style vertical seniors residential attests. Others, such as hotel to co-living are a natural fit. “Given that the majority of the units [at Central Apartments] were already fitted with kitchen amenities, that meant pretty easy renovation works for an incoming buyer to de-risk the acquisition from an immediate capex point of view,” Gibson says. ▲ CBRE Hotels Investment and Brokerage NSW director Tom Gibson. And because of this relatively easy transition, hotels are a hot target for co-living buyers. “We’re seeing a lot of interest from this co-living sector of the market pursuing hotels that are appropriately zoned to be able to extract more value by converting the asset into a co-living use,” Gibson says. “There’s definitely a depth of market there to be able to pursue this type of asset. “The demand from the buyer market for these types of assets significantly exceeds the availability of stock available to acquire.” Hotel transactions, while expected to bounce back this year, have also struggled, providing more opportunity for co-living. The Central Apartments Hotel also was a more difficult sell to buyers for build-to-rent, for example, as its zoning required there be short-term accommodation provision. ▲ Rooftop amenities at the Central Apartments Hotel at Potts Point. “Most markets and councils don’t want to see the reduction of hotel supply,” Gibson says. Such was the case with the InterContinental Double Bay hotel, which was sold by CBRE for $215 million in 2023 to knock it down in favour of a residential block. But the council required hotel accommodation, and a compromise between the parties resulted in a mixed-tenure luxury residential and short-stay accommodation block. “As time goes on and as markets change, I think zoning rules need to change with it [but] unfortunately, it’s not always the case.” Cross country controls Sydney has among the most amenable planning controls for co-living, according to national co-living operator UKO founder Rhys Williams. “In other areas, they don’t have quite the same level of clarity around the planning framework,” Williams says. ▲ Principal at FK Architects Helen Kuo. Principal at FK Architects Helen Kuo says the Housing SEPP 2021 set out requirements for co-living quite clearly and differentiates it from the concept of a boarding house. “There has been a lot of stigma from people who don’t understand this type of product or this sort of alternative housing tenure,” Kuo says. “But Australia, and Sydney in particular, is opening up to the diversity of choice it allows. “A lot of the remaining struggles are really heavily hinged on consent authorities ’ requirements, because co-living requires a management plan as part of the approval process, and if your project blends a hotel and co-living, for student accommodation for instance, what should be considered?” ▲ Rendering of the 430-unit UTAS student co-living project also earmarked as short-term accommodation. This was the case with an FK project for the University of Tasmania providing student accommodation that, during summer breaks, can be leased out as short-stay holiday accommodation. “Then there are also considerations like parking—if it’s full co-living, there are parking provisions to be met,” Kuo says. “If you are really close to transport, there should be flexibility to just not provide parking, full stop. “But there is an evolution of thinking that’s required with consent authorities about how we actually use our spaces. “By trying to plan for and prevent the worst, they are actually preventing innovation and new ways of using our spaces that are much more sustainable.” International investors Whether the planning authorities catch up or not, interest in the sector continues unabated . “BGO, together with Hotel Capital Partners, are active co-living buyers in the market across all of Australia and this was obviously a highly strategic location in a great market in Sydney’s eastern suburbs,” Gibson says. And because of the maturity of co-living markets overseas, the emerging sector is appealing to investors from abroad too. ▲ Rendering of UKO’s Alexandria co-living scheme. “The primary interest we are receiving for these types of assets [is] from offshore private equity and investment management offices with a wider Asia-Pacific co-living and alternative short-stay strategy,” Gibson says. “Acquiring assets with scale is crucial for these buyer types, and further they believe in the growth of the market and underlying resilience of Australia as an investment destination.” But there can be considerable barriers to entry, especially for locations such as Victoria, which Williams says has “some fairly prohibitive foreign tax structures”, meaning co-living can be less desirable to foreign investors. “Foreign investment is made quite challenging by the tax structure in Victoria,” Williams says. “So while there’s definitely demand in all states and territories, it’s just a question of having the planning framework, and the tax structures as well at a state level, to make sure that it’s viable to develop.” ▲ UKO’s Glebe co-living development. Averaging around $600 to $850 a week, co-living rents are not a far cry from those of standard units, and while finding or building the right asset can be a challenge, yields make it worthwhile. “And there’s significant opportunity for rental growth in the Melbourne market,” Williams says. “We see a gap in rents between Sydney and Melbourne that we feel is probably higher than it should be. “But the vacancy rates are still very low, so we think that there’s a very good opportunity for developers and owners to benefit from rental growth out of Covid in Melbourne.” It appears attitudes from all sides are changing towards co-living. “Two years ago, people in the sector would say we’re cramming people into boarding houses,” Kuo says. “But now, there’s a lot more acceptance and a cultural shift which recognises this is actually giving people more diversity of choice and addressing different ways of living.”

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