This episode was recorded on the land of the Wurundjeri people of the Kulin Nation. We pay our respects to their elders, past, present and future.
Richard: Hello and welcome to another episode of Precisely Property. I’m your host Richard Temlett. I’m excited to have you with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discussed all things property with a focus on dynamic discussions with industry leaders.
In this episode, we’ll be talking to Rhys Williams of UKO. So sit back, relax, let’s get started. Reese is a co-founder of UKO, which is part of Veriu group soon to be rebranded as LiveStay, a national operator of service departments, co-living and BTR properties. He has spent more than 22 years in the living sector, starting with a single apartment, which has grown to become a portfolio of over 5,950 keys operating or under construction around Australia, and which represents a gross asset value of approximately 3.2 billion. Rhys leads the UKO brand, which operates co-living and BTR apartments on behalf of developers, family offices and institutional capital. UKO opened the first co-living asset in Australia in 2018 and operates the largest number of co-living assets in Australia, with assets currently in Melbourne, Sydney and under construction in Adelaide, Brisbane and Perth. UKO also specialises in the conversion of built to sell assets into built to rent assets.
Welcome, Rhys.
Rhys: Thanks, Richard. Great to be here.
Richard: Rhys, in today’s episode, we’re going to be talking all things co-living. That being said, I’m happy to also talk more broadly about BTR and your experience on the ground. But really the focus of today’s session is going to be co-living. I do a lot of work in this space, and I can just see the significant interests in the sector, particularly from overseas capital. And I’m keen to just educate the audience about what co-living is and I actually can’t think of anyone better placed to actually talk about co-living given your very impressive experience in track record. Before we get into the session though, I did have an icebreaker question. You spend your career thinking about great places to stay. What’s the most memorable accommodation experience you’ve ever had while traveling and why did it leave an impression on you?
Rhys: Yes, this is an interesting one. And it’s probably not what you’d expect, but I was reflecting on it and I think the most interesting accommodation experience, if you could call that, was actually when I was in cadets at school and we all had to go out and sleep under the stars in a thing called a hoochie. And that is significantly worse than any tent you can imagine. It’s basically just a piece of plastic draped over a piece of string. There’s no door, there’s no floors, there’s nothing anything remotely resembling luxury and you end up being put in your hoochie with a random bloke from your year at school and you’ve really got to make the best of what you’ve got. And the reason that is memorable is because it really teaches us as people in the property industry a couple of things. Number one, everyone does need a roof over their head. If you don’t have that little hoochie roof, you’re in trouble because you’re facing the elements. But the other thing it teaches us is that everything beyond a roof over our head is ultimately ancillary to our needs. And so, when we’re in this industry, it’s understanding what are the things that people prefer, what are the things that people like, but then also, and quite relevant to co-living, what are the things that people actually need in life to achieve functional living? So yeah, which he taught me everything I could ever imagine about what their basics are in life.
Richard: Wow, I wasn’t expecting such a deep and meaningful response, but that’s absolutely brilliant. I think a lot of our listeners is a couple and a mutual friend of ours that made the introduction that it will probably have a bit to say about that. I mean, in a good way. I know he and I have spent time outdoors too. So anyway, enough about that for today before I get too carried away. Before we get into what co-living is, I want to actually just learn a little bit more. You have a very, very interesting and a very inspiring background. I’m keen to just educate the listeners on, on what that is, and particularly who, UKO.
Rhys: Yeah, sure. It’s not a very diverse background, ours, because all we’ve ever done is, is operate living sector assets. We started my business partner, Alex and I, when we just got out of university with a, a single furnished apartment that we let out down in, in Bondi beach. This is at a time before there was the internet. This is at a time when there was no furnished accommodation in the Australian market. We’d just returned from doing a gap year and we saw a real gap in the market there that people were coming into the country, you know, for the working holiday visas, work contracts or extended stays and they needed something for a period of three to 12 months and they needed something fully furnished and there needed to be an operating company that was able to facilitate this sort of experience. So, we literally used to just put ads in the newspaper or stick an ad up on a telegraph pole saying, you know, does anyone need a furnished residence in Australia? So, we got started doing that, built that up to about 400 apartments under operation in eastern suburbs of Sydney. That led us into the service department industry, where we opened our first asset in Redfern in Sydney, a small, almost motel it was. But we eventually got significantly invested in the service department industry where we’ve got our two operating brands, Veriu Studio Apartments and Punt Hill Apartment Hotels as well, which we sort of got going in about 2012 and have built that portfolio up. But in about 2018, We had a fantastic CEO, Zed Sanjana join our service department platform. He came out of quest, our leading quest previously. And he basically said to Alex and I, look, I’m going to take the charge here and take the lead on the service department platform. You guys are out of a job because I know more than you, which was, which is true. And we thought, what are we actually going to do with our time? Our deep passion had always been this idea of creating a community-led flexible furnished apartment product in the Australian market, which the word co-living was starting to be bandied around in about 2018 or even just before.
And we could also see that there was a significant interest, albeit early stages, from institutional investors to start to own residential assets in Australia given the defensive nature of our environment and the low vacancy rates. And so what we did was we said, look, we think we can actually sort of lead the market here and build an operational brand for private developers, for family offices, and for institutional capital that brings the operational smarts to the living sector in both co-living and build to rent apartments, which also leveraged on our experience in hotels, hospitality and service departments to try and generate the best outcomes possible. So, you’re right, we opened the first Australian co-living asset, which was a small sort of 35, 40 studio products in the inner west of Sydney in 2018. And we’ve opened over 30 assets now. And every single asset has been a learning experience for us on this journey for us, for our investors, for key members in our team, and also for our occupants as well to learn how it all works. So, it’s certainly a journey and it’s got a long way to run yet.
Richard: Thank you very much for sharing that. That’s absolutely amazing and inspirational. I just did have one question to close things out. When you started renting out those apartments, do you recall what year it was?
Rhys: The very first apartment we rented?
Richard: Yes, your very first one.
Rhys: Yes, mate, you’re testing me now and showing my age, but I reckon it was 2020, 2002 was the very first apartment we rented out, first year of uni.
Richard: That’s brilliant. Why I’m asking that is you’ve obviously been through a number of market cycles, and I love getting people on the show that have seen the peaks and troughs in the rental market, just in the property market. No doubt it’s informed a lot of the decisions that you’ve made more recently. So, I’m keen at certain points during the session, we start talking about the evolution of co-living and BTR. I’m keen to pick your brain, particularly how you’ve seen the rental market evolve over the last, if it’s 22 or 24 years now. No doubt there’s been huge evolution, but your comments about just the management expertise I’ve learned very quickly. It’s highly sought after, there’s significant value in this, but I think there’s no substitute for you in terms of actually knowing who and what the Australian renter is. So that’s incredibly valuable.
Yeah. Look, I mean, we’ve operated assets in the living sector through, as you say, cycles. We’ve seen GFCs, we’ve had various terror attacks going on around the world. And obviously we had the significant event of COVID and a huge learning for us. And I guess it does relate a little bit back to me talking about sticking a tarpaulin over your head in the bush is that everyone does need a roof over their head. And so ultimately, living sector assets, be it co-living, Build to Rent or service departments are extremely defensive, saw struggles obviously in the PBSA sector during an event like COVID. And we saw some struggles in the traditional hotel sector, during COVID. But we really like operating assets where there’s a Kitchen and bathroom and a self-contained nature to the asset because we see it’s being very, very enduring and defensive. And then ultimately, once the four walls and the core of the asset’s established, as you were alluding to there, it’s all about understanding customers understanding design and working out a way to deliver excellent outcome for a renter or a guest, but also energizing the property so that it delivers the very best financial returns for an asset owner. Because it’s not easy, as you know, Richard, to make any development stack in residential or in the living sector or in service departments, for that matter. So that’s, I guess, the bridge that we try and cover. for developers, investors and capital.
Richard: Great. Okay. I realize now that a couple of days ago you sent me a co-living report and thanks for that. I had read it before. It is a fascinating read where it looks at the supply, the demand and compares co-living to BTR and also to Build to Sell apartments and even student accommodation across various metrics. I will include a link to that report just for our listeners that are keen to learn a bit more. Obviously, they can reach out to you. But I read that report again this morning, just in preparation for this session. I was keen to talk about some of the concepts with you, but let’s start again, just from the basics. what is just for our listeners that might not be as close to co-living as you are. What is co-living?
Rhys: Yes. Important to clarify it. Co-living can be defined really in two ways. One way you could define it is it’s just studio built to rent. Simple as that. It’s just if people understand what build to rent is, which is, you know, one, two, three-bedroom apartments, it’s just a studio version of build to rent. I describe it that way. The other way I describe it, and it’s very important to understand this is it is basically housing solved for single people, especially young professionals, because about 80% of the occupants in a co-living studio, which is typically 22 to 25 square meters, they’re a young professional and they’re single. And so co-living bridges the gap for a single person into their own living environment where they’re not having to be in share accommodation student housing, nor are they having to rent a large unfurnished one-bedroom apartment. Long answer, but it’s very important. Interestingly, if you look around the world, Richard, co-living is defined in different ways. So, in the US, for example, co-living is more seen as that shared accommodation environment. Whereas in Australia, co-living is, and there’s planning frameworks around it, especially in New South Wales, to give that clarity. It’s a self-contained studio apartment, 22 to 25 square meters, with amenity provided, often utilities included, furniture provided, and on-site management. But very much self-contained as opposed to some kind of room share or, or boarding house or any other definition that might leave us understood. Fantastic. All right. I’m keen to just delve and say just a little bit more. You made a comment about the sizing 22 to 25 square meters that is typically smaller than a lot of the BTR accommodation or the Build to Sell accommodation. In the report that you referred to, they basically compare the loss of that, say for example, the 20 square meters, the 45 square meter, rental apartments that people are probably quite familiar with compared to the 25 square meter studio apartment for co-living. With that 20 square meter loss of space, what is always not included in the apartment for co-living in terms of the amenities? I suppose my question is also, there shared amenities in the building? How does that all work?
Rhys: Yeah, so I guess a consumer or renter has a choice when they’re looking for their rental housing is that let’s just assume it’s a single person age, you know, 28 years of age and they have a choice now. They can either go and rent an unfurnished, as you say, 45 square meter or 50 square meter, one bedroom apartment. They’ve got to then buy furniture, sign typically a 12-month lease, connect their utilities, connect their Wi-Fi infrastructure. And then when they arrive, they’re sitting in their apartment, you know, arranging removals and not really getting to know anyone as well at the end of the process. It can be quite a lonely, daunting, expensive and limiting process for certain corners of the market. So, co-living basically steps in and says, okay, we’re going to give you a 25 square meter studio. It’s going to meet all of your functional requirements. So, it’s going to have a couch. It’s going to have a coffee table. It’s going to have a study area, an ensuite bathroom and a kitchenette. So, all your functional requirements are met in 25 square meters. But in addition to that, it’s going to be fully furnished. It’s going to include your utilities. Then you will have an onsite manager, which we call a community manager or a community host who looks after your building that you’re in. So, they’re actually physically onsite. They’re connecting you with other people in the building in community events. They’re attending to your maintenance. They’re involved in the leasing process. They’re involved in the move out process. And they’re a point of call for you in the building. And you also within the communal areas, which is typically around two to three square meters of amenity area per sole occupancy unit, you’ll have things like co-working space, you’ll have bookable meeting rooms, you’ll have potentially private dining arrangements, you’ll have wellness areas, you’ll have a resident lounge. These things are tapered up and down depending on the size of the asset. But these are the sorts of things that if you’re willing to give up 20 square meters that you may not really need in your apartment, you’re getting access to all of these other fantastic amenities and overarching it is a community of like-minded people.
So, if you can imagine you’re living in a building, let’s say it’s got 100 studios, 80 % of them are single people in the 25 to 35 age category, all trying to get ahead in their professions, make other connections, be it personal or professional. And so, it creates a very, very interesting environment that seems to be a far better solution for housing and for renting than the other alternatives in the market. And what that really says is it’s a very deep market, if you can imagine, and it’s not a risky market to be in either.
Richard: Very clever. Yep. You started touching on the definitions both in Australia and globally. I’m keen to delve a little bit more into the definitions just across the different states in Australia, because certainly the report that you have shared shows that Co-living really is most mature in Sydney. Sydney is the epicentre. Why has that occurred?
Rhys: The vacancy rates across Australia, residentially, let’s just say 2% across the board, some more, some less, but there’s, you know, under supply in all rental markets in Australia and there’s no shortage of demand for a co-living studio in any of our capitals. Also, in areas like you know, a Newcastle or a Wollongong or a Geelong, these sort of satellite places as well. But the reason it has grown so significantly in New South Wales is because of the planning framework that has been designed. Mostly successfully by the state government, there’s a housing set which gives clarity to developers for co-living as a permissible planning use in New South Wales. The rest of the states aren’t quite up to New South Wales in terms of creating that planning clarity. Melbourne probably has the least clarity. It’s certainly doable in places like Adelaide, Perth and Brisbane. Melbourne is a little bit more confusion there, but the demand is very strong in Melbourne in terms of the resident. So yeah, we hope to see ultimately Richard a bit more clarity in all states for co-living because it creates supply and we all know the importance of supply for our economy.
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Richard: In the report, it basically said that there are about 2000, if I recall correctly, about 2000 co-living dwellings that had been completed with a quite a number of thousand, I think, or maybe 1500 in the pipeline. The large majority was still in Sydney. You made a comment about just how difficult getting projects to just be financially viable right now is. When I’ve done a lot of work with BTR in Sydney, it’s very difficult to get BTR to stack up. However, It appears that co-living can stack up and I’m interested to understand from you, if you could just explain to the audience why that is in terms of the size of the site or the cost of the land and also the overall yield and how that is able to in certain locations stack up, whereas other asset classes like Build to Sell or Build to Rent can’t.
Rhys: Yeah, yeah. Very interesting and topical question at the moment. Look, I think at its core, co-living studios get a better rent per square meter than a built to sell residential rental apartment or a BTR apartment. So, they ultimately get a better rent per meter and that gives a feasibility, much better probability than doing a traditional larger format built to rent apartment. So, and I think also when we look at it doesn’t require because of the value it delivers to the customer, a co-living feasibility doesn’t require this resort amenity that these larger scale BTR assets are having to put in. They might not always want to put them in, but they sort of have to to hit their feasibility underwriting. And they’re targeting a very high echelon of the market. This sort of the top 5% of the renter they’re trying to target. Whereas co-living is a much more affordable product, it gets a better rent per square meter, and it doesn’t need the extensive amenity to still deliver value to the consumer. And so, all of those things go into the mix to give the feasibility a much better chance.
Richard: Great. Before I get onto the value proposition for renters, which I know you started to answer and I will tease it out in a little bit more detail. I was interested to see that a lot of the schemes, the size of these are actually quite different to BTR. When BTR emerged, it sounded like people were trying to get as large a development as possible, you know, 400, 500 apartments, trying to get really scale. And then there were other developers that started to come out saying maybe it’s 150 to 250 apartments and different developers have different business models or different views on the scale of the buildings. Some of them do smaller than that. I saw in the report, and I’ve noticed it for a while, that the code of things seems to be significantly smaller or at least it’s emerged smaller. So, what are your views on that? Is there a sweet spot? Why is it a bit smaller? And when I say smaller, it’s often under 50 apartments in some of the schemes that I’ve seen.
Rhys: It has emerged smaller because a lot of the early stage work we did under the UKO brand was with private developers who were willing to take the time and the risks to understand the business model and they might have had unused land that they were going to develop. But now there’s institutions from all over the world looking to deploy capital into co-living. We operate assets, anything from 30 up to, you know, we’re looking at projects with 250 studios at the moment. There’s a certain niceness to having a community with, you know, 80 to 100 apartments. Sometimes if you’re doing 500 or 1000, you’re going to lose a little bit of that sense of community. And I think a lot of those very big BTR projects that you’re referring to had to deliver on scale to get construction efficiencies, to get their feasibility to work. And they’re also trying to deploy very significant amounts of capital, obviously as much capital as they can, into the rental market, which is not a bad thing. But yeah, we like to see projects these days, anything with 50 to 250 apartments. And these projects are working not only in city or city fringe, but also suburban areas as well, which is very interesting.
Richard: Great. Well, you have spoken about the value proposition for renters. One thing that I’ve certainly become aware of is that when people look at co-living and they might see the headline weekly rents and they compare it to not necessarily PBSA or student accommodation, unless you are a student, certainly financiers will look at that to benchmark it. But if you look at then the BTR weekly rents or the Build to Sell weekly rents, often, or for the most part in especially Build to Sell rentals, you have to add on things like, you know, your utilities and so forth, whereas it’s all inclusive in the co-living headline weekly rents. How have you found the market respond, respond to that?
Rhys: Yes, it’s, it’s an interesting one. We find that the Australian market don’t like having to pay extras upon extras upon extras upon extras. In the US BTR market, there’s a lot of work done around achieving ancillary income by providing a whole bunch of tailored solutions, you know, a dry-cleaning service, a pet washing or walking facility, all these sorts of things. But people really like the idea in co-living of being able to walk in and having all their furniture provided, their utilities connected, which is a huge hassle off their back. And knowing kind of exactly what their cost base is going to be when they walk through the door. So when we compare the value proposition, Richard, and we say, okay, a one-bedroom modern apartment might be $700 a week, but then you’ve got a lot of on costs on top of that and capital costs, and that’s 45, 50 square meters. Well, if a co-living studio is $700 a week including everything, including the cost of your furniture and access to those uh extra amenity areas, it’s showing genuine value to someone. That’s the difference between co-living also and BTR is that the large BTR developments, there’s not a lot of mid-market BTR coming out of the ground. There will be in time when various build to sell projects convert to BTR, but the BTR product predominantly in Australia right now is servicing that very, very high end, as I say, of the market. So, co-living presents a different value proposition, in my view, a very good value proposition, which makes the cash flows very defensive and very secure. And so, from a valuation perspective, we believe that in time, for instance, the cap rates between living and Build to Rent, given that they’re very similar in nature, should ultimately merge
Richard: Gotcha. We’ll get onto the valuation of co-living and BTR in a second. But before we get to that, there’s a step missing that I want us to just flesh out a little bit more, really how BTR compares to co-living and how they’re different. And you did start to answer that, but let’s talk a little bit more about that because I do want to go into the valuation of the different assets and what your views are on cap rates and so forth. So BTR versus co-living, you spoke a little bit about the typology. Obviously, you do both. So what have you learned or what is the distinction or similarities between them?
Rhys: Well, as we touched on co-living is an all studio product, very inclusive in nature with rents and furniture. Whereas BTR will have some studios into it and they’re integrating more into their designs, but it’s also got one bedroom, two-bedroom, three bedroom apartments, some furnished, some not furnished. And more often than not, you’re paying obviously your utilities on top. Both assets have amenity areas, well-considered amenity areas designed into them. Both assets have onsite management as well. And both are, you know, I think very well operated by people around the country, know, not only us. So they’re good living environments, both of them in that sense.
Richard: Gotcha. In terms of the operational or operations of the different assets, Co-living versus BTR, are there significant differences? I know you said that BTR might have greater levels of amenity or targeting the high end of the market, but just from when you look at your cash flow and your, sorry, your feasibility, the overall ongoing management, is there a big difference?
Rhys: No, look, firstly, we put them in the same operating, you know, our BTR assets, our co-living assets are all run through the exact same operating system. It’s the same team at our corporate office, people who are experienced in a BTRS or a co-living asset can handle the same thing. The operating costs at a P&L level are largely the same as well, say for the utilities, which gets carved out as we discussed before. So those sorts of things, guess, when we’re looking at um the nature of the operation are there. And then it’s just around the length of stay between BTR and co-living. Cut of living people usually commit to a three-, six-, nine-or 12-month lease with typically one renewal off the back of that. And BTR, that’s usually a six or 12, 18-month lease max. So, in terms of the, I guess the whale, as we call it in real estate or the average length of stay, BTR might be 14 months, whereas co-living might be 11 to 12 months. So, it’s not actually that great a difference in the length of stay, but there are opportunities in co-living for a bit more churn in the CBD or fringe assets where you’ve got a lot of corporates who are coming in for three or six months specifically for a contract. They’ll pay a higher rent because they need that flexibility and then they’ll churn in and out of that environment as well. But you know, BTR, when you look at it globally, people enter into four or five year contracts. We don’t see that in BTR in Australia. And co-living, think, like I say, 11 to 12 months stay is the typical length of stay, depending on whether you’re CBD or out in the suburbs.
Richard: Gotcha. Very interesting. I did see in the report that there was a section on the length of stay, which I do find very interesting.
Rhys: Yeah
Richard: Particularly, but it makes sense given the slightly different demographics and the reasons for people coming into co-living. I’m keen to then switch gears. Let’s talk about the valuation around co-living and, and, and BTR and really some of the assumptions. So how are you finding the space? I suppose the first question also is how are you finding these assets actually being valued? Do you think it’s not a criticism of the industry, of course, but are the valuations coming through actually accurately understanding the asset class and valuing it accurately?
Rhys: What we see in co-living is that the valuation teams with experience in places like the UK have a much better grip on how to value these sorts of living sector assets than more your local valuer are because they’ve just seen an earlier evolution in places like the UK of co-living or BTR. So, some of the bigger firms who have people with global understanding often are the best to provide those valuation advisory works. As it stands at the moment, we see about a 50 basis point spread between BTR and co-living. So, if BTR is getting a 4.25 % cap, then co-living might be on a 4.75 % cap. Co-living therefore is a bit more than traditional Build to Rent, but it’s probably also a little bit tighter than purpose-built student housing as well, which I think makes sense. Like I say, the ultimate question would be why is co-living got any valuation spread to BTR. What these value is though, and it’s quite interesting to understand this, what they’re all trying to rely on as any good value it does is comps. And so, the value is will come to us and you know, they’ll say, we’re trying to understand the short around the cash flows. And we’ve got our head around that we can say it’s a defensive asset, we can say it’s very well occupied. All of those things, from evaluation perspective are taken on board. But there aren’t where a value can turn around and say, look, I’ve just seen a 200 unit co-living asset trade on a four and a half percent cap rate. Therefore, I can very confidently say, yes, I’ll be putting 4.75 or 4.25 on the asset that I’m valuing.
So, there is a little bit of common sense that needs to prevail. And I think a lot of that is just diving into the surety of the cash flows and understanding as an investable asset, what is the risk profile of it and what is ultimately making sense to an institutional investor especially, or a private investor, when they’re comparing it back to other places to deploy their capital, be it office, retail, industrial, and these other alternatives to deploy capital. And so, I think the cap rates are reasonable, in these spaces. There will be more comps that still have to come through. But ultimately these assets, co-living will prove itself as it has done as being a very defensive and stable cash flow with a very broad market that is, you know, being single people, 25 to 35 who want to roof over their heads.
Richard: The other element of that, that I was keen to just get your views on is the net operating income. Obviously, there’s a lot of value derived from how efficiently and well the buildings are operated. How are you finding that in terms of the day-to-day running of the buildings? Is it different between BTR and co-living in terms of the metrics that you try to aim for and things like that?
Rhys: No, it’s very similar to BTR in terms of the operational metrics. I guess where with UKO, operating over 30 assets, we do have a you know, an advantage that we can, we have real data points throughout our portfolio, which we can rely on to provide accurate cost benchmarking and every new asset we open, we learn something more. And we’re also very keen to achieve cost efficiencies by nature of getting bulk deals for things like utilities across our portfolio for our investors and developers as well. But ultimately, yeah, it’s the very, very similar cost space to BTR has onsite management, has amenity areas, has lifts, has fire, has community events. All of those things are baked into our feasibility that we do.
Richard: Fantastic. Well, look, the final question then for today is, is there anything that you’d like to leave? We do have a lot of government listeners, leave government listeners with in terms of how they can set the industry up for success, whether it’s planning or tax or, any other changes or things like that, that could really just help the industry. Cause it’s clear to me that it does have an important role and it is one of the solutions to the housing crisis. So, for the government listeners out there, knowing that we’ve got federal and state budgets coming up, we’ve got state elections in Victoria. There’ll be elections around the country over the next couple of years. What do they need to know? And to, help this asset class emerge?
Rhys: Look, I think number one is planning. Number one is having planners from other states and territories outside of New South Wales look at the good work. It’s not perfect in New South Wales. There’s things we may not always agree with, but there’s been some good work done in New South Wales. That’s already reflecting in supply, a huge supply difference from one state to the other. They’ve all got the same vacancy rates, but New South Wales, as we touched on earlier, has achieved significantly more supply. So, I think planners and regulators from other states should look at the way in which co-living is being treated in New South Wales and adopt something very, very similar to give clarity to developers and investors looking to create supply so that they can have confidence in the planning outcomes that they may achieve. And that will ultimately be a huge benefit to Australian renters. So, I think that’s that really is number one.
Richard: Gotcha. Well, look, you’re a wealth of knowledge. So that’s all I wanted to get through with you today. I’ll put the links to both the report that you kindly shared as well as yourself in the show notes. I encourage our listeners just to reach out to you. certainly, a wealth of knowledge and no doubt because there’s just so much interest in, Melbourne, and I know obviously you’re active in Melbourne, I can’t help thinking that there’ll be more opportunities coming through, but I do take your point about planning needing to just be clarified here, which will then just enable the asset class to continue to emerge.
Rhys: Exactly. We would love to see, I mean, we’ve got open really the first co-living asset in Melbourne in the CBD, which has been very, very successful. And we would really love to see co-living embraced by the planning community in Melbourne. We’re speaking to developers every week. We’d speak to three developers from, from Melbourne, who are looking to get projects underway and they are finding ways to make it happen. But I think a little bit more clarity would really unlock some great outcomes for renters in the Melbourne market. So yeah, Sydney’s a good example.
Richard: Well, look, Rhys, thank you very much for your very valuable time. I know you’re a busy man and I really appreciate you coming on the show today just to provide us with a really good education piece on co-living.
Rhys: Richard, I say thanks for taking an interest, I really do appreciate that you’re taking interest in this space. It’s exactly what we need, so yeah, thank you.
Richard: Hi everyone, hope that you really enjoyed the episode with Rhys today. I found it incredibly insightful and I really do feel that co-living has a very important role to play as one of the housing solutions for Australia over the next one to two to three decades. And it’s going to be interesting to see how that actually does play out. In terms of the three findings for everyone to take home today and think about, the first one relates to planning certainty and I think it’s very interesting when you look at the supply of co-living dwellings in Sydney and you compare that to all the other states and territories, and you can just see that there’s been a much larger amount of supply in Sydney compared to the other states and territories. And at the other end of the spectrum, Reese’s comments about the fact that there’s such a lack of planning certainty in Melbourne, which means that it’s very difficult to get these projects to be viable and to be actually funded by investors. And I think that’s incredibly important just for our government listeners to be aware of. Across Australia, the different levels of government are slowly starting to send the correct signals to decision makers and capital with respect to some of the planning changes that are either proposed or being implemented. However, certainly more needs to be done. And I think that following Reese’s very good comments, which certainly I 100 % agree with when I study all the statistics, show that if we do get planning right, provide that clarity, that certainty, the market will start to respond. And I think it’s important, not just for co-living, but for a number of other asset classes, that they be appropriately defined in the legislation to just help with them to support it to be merged.
In terms of the second point, Rhys’s comments about the asset class being a defensive asset class. I think, again, I can’t emphasize how important that actually is. I’m consistently still having arguments with a number of people turning around and going, well, if you look at the returns and you compare those returns to say term deposits, is it really worthwhile taking the risk? And again, I always response that by going, well, remember the return you get is just one component. Also, obviously the risk is the other components. They’re two sides of the same coin and they need all your investment and development decisions need to be made, looking at both the risk and the return metrics and ratios. I certainly agree with him, co-living like BTR and like some of the other living sectors is a very defensive asset class and capital actually really likes that. It likes the lower levels of volatility, the long-term data returns that can potentially be achieved. And I think that again, it’s very important to just keep in mind because different types of investment or development do have different levels of return, but it is commensurate with the risk, that people are taking on.
Finally, then I did think that Rhys’s comments about cap rates and the difference between BTR and co-living actually is quite well made. And I will follow with interest as to where valuation and I suppose the industry as a whole lands on cap rates and whether they do think that BTR or co-living should have slightly different cap rates, again, commensurate to the risk being taken on. But certainly from where I see it, there’s a very, very deep markers for this type of occupier to occupy these dwellings and when I’ve actually really studied the markets particularly single loan person households whether they go into BTR whether they go into co-living, I suppose even whether they’re going to Build to Sell, that is a significantly deep market and does need to be more appropriately reflected in the cap rates. I appreciate that cap rates for living sector asset classes will be different to some of the other sectors like industrial, retail, commercial, but I do, and I will watch very carefully how the market continues to merge and evolve over time. Really as finance understands the different risks and returns of those two asset classes, which are very similar, although they are distinct. I think that that’s all I really need to highlight today. Please do reach out to Rhys if you have particularly Melbournians who are looking at whether or what they could do with some of their projects right now, given the points in the economic cycle and the macro overview in Australia, but also applies to Melbourne. He’s a wealth of knowledge and I think you could actually learn a lot talking to him about what some of the opportunities are in the Build to Rent or the co-living or service department space.
Anyway, I hope you have a lovely day. Thank you very much. Bye.
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