Developers are starting to think smaller as the European housing shortage gets bigger, writes Frances Robinson.
Just south of the Thames, a short walk from Elephant and Castle tube station, there’s a show flat for a whole new type of development. It’s smart, sleek and in line with the UK’s official one-bedroom space standard as set out in the National Planning Policy Framework. The floorplate for the one-bedroom flat, which includes a wet room shower that wouldn’t look out of place in a fancy hotel, a cute kitchen and floor-to-ceiling windows, is just 38 sq.m. It’s the creation of Pocket Living, a British company, which since 2016 has been 50% owned by Related Companies, a New York-based real estate firm headed up by US billionaire Stephen Ross.
The development put 70 homes in the space of what was previously garages for 14 cars, sandwiched between public housing and railway arches. It’s also at the forefront of a new trend. Young professionals, students and key workers want to be in city centres, reflecting the new global wave of urban living. They are willing to live in smaller spaces, as they simply don’t need as many objects as previous generations – cars are rented by the hour, music and entertainment are stored digitally, and they spend disposable income on experiences, not objects.
This development approach is known as compact living, or micro-living, though few agree on the precise definition of the terms. “We don’t like the term micro-living,” said Smithers of Pocket Living. “We don’t think like other developers and believe in high-quality and well-designed homes for our customers.” Their homes are sold at a discount of at least 20% to the open market and only sold to local people on moderate incomes. The homes are maintained on that basis in perpetuity as a permanent first rung on the housing ladder.
Hot in the city
“One of the reason we think [compact living] is developing is the winning cities concept,” said John Danes, head of Continental European Property Research at Aberdeen Asset Management. “There’s very strong population growth in major cities across Europe while across the continent as a whole, the population is remaining relatively flat.” Showing PIE around the Central London apartment, Lucian Smithers, Pocket Living’s sales & marketing director, pointed out the larger-than-standard door apertures and ceiling heights which make the space seem bigger.
The steel-framed apartments are built, decorated and fitted out in a factory, before being assembled into an apartment block. “I don’t think anyone predicted in the eighties and nineties how successful cities would become,” Smithers said. “With
A render of the MINI Living space in Shanghai
(image: BMW Group)
the advent of the internet everyone thought you could relocate to a farm in Wales and work in your underwear.” But the advent of connected cities had the opposite effect. “Cities are the most efficient transformers of wealth and ideas,” he continues, and now 25-35 year olds are “very mobile – it’s a global arms race of trying to retain your intellectual capital and workforce.”
The stats bear this out. Nick Whitten, director of UK Research at JLL, is working in partnership with the British Property Federation to draw up a set of definitions for micro-living, because there are so many different terminologies in use currently (coliving, which is more about shared spaces, is closely related to micro-living).
The Mayor of London’s London Plan states that the population of London could grow by 91,000 – 106,000 people every year in the decade to 2021. By the 2020s there are likely to be more Londoners than at any time in the city’s history. According to Whitten, Manchester’s city centre had a population of around 10,000 back in 2000: it’s now around 70,000. “One way for homes to become more affordable is they have to get smaller,” said Whitten, because for buyers or tenants, a smaller space means that overall, they are paying less, even in highly desirable city centre locations. “People’s trade-off for choosing a high-demand location is to look at smaller housing options or house-shares.” Another difference is that the generation leading the micro-living trend simply don’t care as much about objects, preferring to spend money on experiences.
Luxembourg-based investment manager Corestate recently acquired the micro-living asset WOODIE, a student residence in Hamburg that comprises a total rental area of 7,700 sq.m. – divided into 371 apartments, most of which are just 19 sq.m. The building is made of wood, hence the name. Student halls and other forms of micro-living make up around 10% of Corestate’s €22bn of assets under management.
The concept for MINI Living, where small apartments will combine with communal spaces (image: BMW Group)
“People say 19 sq.m. isn’t big, but you can provide everything a student needs – they’re only going in to study and sleep,” said Thomas Landschreiber, Corestate’s CIO. “It’s a completely different mechanic in terms of rents, because students aren’t using the price per square metre to compare, they want an all-in rent with wi-fi.” He adds there’s plenty of proof that size doesn’t matter – in general it is much easier to rent out 19-20 sq.m. apartments than 27sq.m. ones, he adds.
Indeed, the appeal of diminutive apartments in great locations isn’t just limited to those who are studying. “We did some analysis, and it turned out 30-35% of tenants in student homes weren’t students,” explained Landschreiber, with strong demand from travelling professionals who are seconded to a city for 1-6 months. That’s making it very attractive for investors, too. “Every week, I get a call from a foreign investor asking to do a student home joint venture… there’s a lot of players coming into this niche.”
That’s reflected in data from StudentMarketing, a global market intelligence consultancy that specialises in student housing and micro-living asset classes. They monitor over 4,500 purpose-built student accommodation buildings across Europe, and say about 10% of them have apartments for young professionals as well. Some countries, particularly Germany, make more usage of this hybrid model. There are diverse reasons for this, added Stefan Kolibar, StudentMarketing’s head of marketing. “Germany attracts internationally mobile young professionals,” he said, including both graduates who remain in their student halls because it’s easy, and young professionals who are drawn to Germany’s buoyant job market. “Germany has multiple strong cities and regions, unlike some other countries with just one dominant city,” so people keep moving.
Location, location, location
Compact living will remain something of a niche, as it’s limited to the biggest cities, added Aberdeen’s Danes. “It only really works as a concept in some of the biggest cities in Europe, where there is that kind of high rental pressure,” he said, citing London, Amsterdam, Copenhagen and Stockholm. “It has to be markets where the cost of renting is quite high, otherwise people would just rent bigger apartments, where it’s affordable anyway.” But that does mean that, for investors, overall rents per square foot are higher, “but in terms of the actual apartment, for the tenant, because it’s smaller they may actually be paying less.”
The exterior of WOODIE, the wood-built student housing complex in Hamburg (Credit: Corestate/Goetz Wrage)
That also makes it a very exportable idea. European expertise in making good things come in small packages is proving a hit worldwide. BMW’s MINI brand is known for small cars, but a new venture, MINI LIVING comprises everything from temporary projects designed to debate how people use urban space to very real developments – in Shanghai. “Taking our design principles as a basis, we are going to transform a former paint factory of around 8,000 sq.m. in the Jing’an district into an urban hotspot for living, working and playing,” said Oke Hauser, creative lead of MINI LIVING.
MINI is working with Chinese project developer Nova Property Investment Co., and the project will contain homes for singles, sharers and families on short, medium-term and extended tenancies. “There is a mismatch of what the housing market provides and what most people really need to be offered in cities,” he added. “We need to find answers that work more intelligently with the limited space available.”
Size does matter
However, doing more with less can also act as a fig leaf for crowding too many people into urban spaces. Homes built as self-contained units in the UK have to have a floorplan of at least 37 sq.m. “What local authorities are keen to see is housing built above, or at least at, minimum space standards for those who need it,” said JLL’s Whitten. “But they are now increasingly open to housing solutions on a larger scale in pressure locations where there’s a much greater demand.” That means developing more shared living developments, with student halls a front runner.
The entrance of WOODIE (Credit: Corestate/Goetz Wrage)
“Land is always going to be a finite resource, so you need to think about solutions to make those urban areas available to more and more people,” he added. “Much of the understanding about size thresholds relates to the Parker-Morris report [completed by the UK government in the 1960s on standards for space in public housing],” he noted, “but the requirements of a 1960s house are very different to what we’d expect to see today.” And as investors rush in, they should remember that while overall rents per square meter are higher, there are others costs to consider. “One thing that’s very important when investing in micro-apartments is that the length of stay of residents tends to be much shorter, so it’s very important to incorporate that in your cashflow models,” noted Aberdeen’s Danes. “You may need to do more refurbishments between tenants compared to a standard privately rented block.”
Plenty of questions remain, as the British Property Federation carries out research into the trend for living in smaller spaces. “Compact Living offers a living compromise where one can sacrifice on space, yet still enjoy the merits of living in a prime city location, with a quality design at an affordable price,” BPF policy officer Raja Hanna wrote in a blogpost earlier this year. “The big question to ask here is whether Compact Living is just satiating the current state of the housing market by providing an alternative but not posing a real solution?” The BPF’s research is due later this year.
It’s a space where many developers are adopting different approaches, but all the signs point to one thing: the rush to get into cities will not stop any time soon. “We all love cities,” added MINI Living’s Hauser. “They are the incarnation of the buzz, interaction, and community that make us creative and productive.” When it comes to fitting everyone in where they want to be, it seems small is beautiful.