Investors and venture capitalists tapping microflats for boosting growth in real estate

Net yields are pushing property developpers towards microflats as opposed to build-to-rent private apartments.

In a development that has taken many in the real estate market by surprise, priced out of London’s traditional housing market, millennials are now opting to rent tiny apartments in “co-living”, an area that private investors and venture capitalists are eager to channel their funds into.

Investors have directed more than $1.28 billion (1 billion pounds) into “microflats”, whose residents share the lounge, dining areas, work spaces, gyms, and the laundry rooms.

Founded in 2010, The Collective is a company that has become one of London’s major co-living developers. As per its website, its Old Oak co-living apartment building in west London is the world’s largest microflats which houses 546 people across 10 floors

“There’s a complete lack of affordable and good quality accommodation for young working people,” said Reza Merchant, chief executive of The Collective.

He went on to add, the company is looking at more sites across the UK as well as in other major cities around the world.

With typical sizes from 200 square feet to 350 square feet for a studio apartment, microflats are storming the real estate market from New York to Hong Kong.

As per The Collective, with a median income of 32,000 pounds a year, tenants at Old Oak have a median age of 28 and pay 230 pounds to 360 pounds per week, including bills.

“For people at certain stages of their career … it definitely makes a lot of sense,” said Ivan Soto-Wright, a 27-year-old resident of The Collective Old Oak.

Microflats now accounts for nearly 5% to 10% of Britain’s 25 billion pound build-to-rent private rental sector, said James Mannix, head of residential capital markets at property group Knight Frank.

According to investors, micro-flats create attractive income streams since their space utilisation is more optimised and efficient.

“This strategy will provide us with an investment that has long-term, defensive characteristics,” said Arron Taggart of hedge fund Cheyne Capital Management, which has invested in one of The Collective’s schemes.

Although investors opine that the demand for microflats is set to boom, a potential hurdle is likely to be getting planning permissionf from local authorities.

According to NativeNative Finance’s co-founder Prasanna Kannan, working with local authorities will help mitigate these issues and will enable investors to build more of these innovative schemes. The company, with the backing of venture capital firm Passion Capital, is seeking to get London’s local authorities on board its project.

However, microflats in Brtain face strong headwinds since property investors tend to focus on traditional apartment blocks that are designed for families as opposed to micrflats which are designed for co-living.

“While it is hugely socially encompassing, it does have its drawbacks from an operational perspective. You might have high voids, it costs a lot to run,” said Toby Nicholson, director Colliers. “It is going to be relevant, but it’s not going to overtake or outweigh the traditional approach to residential in terms of studios, one and two bedroom regular flats.”

According to the results of a survey by consumer group – Which?, in terms of sale prices, smaller residential properties did not perform as well as larger ones. While the price growth for smaller apartments than 37 square meters was 6.9%, larger properties recorded a growth of 8.7%.

However in terms of yield, microflats have a net initial yield of 50-100 basis points above a traditional apartment, said Adam Challis, head of UK residential research at property consultant JLL.

As per Savills, a property developper, the development of traditional build-to-rent private apartments in London have a 3.5%-4% net yield.

Knight Frank puts comparable prime central London yields at 3%-3.25%

As per Jatin Ondhia, CEO of Shojin Property Partners, who has invested in the microflats project being developed by property group Spaces at London Bridge, central London, 172 microflats are to be developped at a cost 80 million pounds. This will deliver a net yield of 4%-4.5%.

While Shojin and its investors have provided the bulk of the funds for Spaces’ project, as per Ondhia further funds for the project will be sourced from an online crowd-funding platform on Sept. 1.

Towards this end, Spaces is now in “advanced discussions” with a few large institutional backers. The company has previously tapped private investors to fund its development projects.

“They’re willing to back us from a strategic perspective so we’ve got the ability to deploy capital quite aggressively and quite quickly and bid effectively on land opportunities,” said Zafar Bhunnoo a partner at Spaces Development.

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