Dedication to disruption is something Reza Merchant takes to a whole new level, if the extent of his risk-taking is anything to go by. There are not many 25-year-olds who would fund the expansion of their fledgling business by leveraging a £1.8m bridging loan against their family home.
The founder of The Collective – a London-based, shared-living concept offering affordable renting options for people on median salaries – will concede that the 12-month period in 2012 in which he became responsible for ensuring his parents and sisters kept a roof over their heads was a stressful one. But it also becomes apparent that he would do it again if he had to.
“To make things work, sometimes you just have to be completely dedicated,” he says.
As it happens, it did work. The loan covered the £1.8m refurbishment bill required for Merchant to develop his first multi-unit property – an 11,500 sq ft derelict mansion block in Camden, NW1, the first of three Collective buildings in London that now make up the bulk of his multi-million-pound property empire. “When I found the building in 2011, development finance was nigh-on impossible to come by, especially for a developer without a track record, like me,” explains Merchant in a hotel bar near his new Hyde Park Collective property. “But I was so confident I could make good returns on it when it completed, I made sure it happened.
“The only option was to take out a loan at around 18% per year which was secured against my family home. It wasn’t what my mother or sisters wanted but my father backed me 100% when he saw how confident I was that I could make it work. So we went for it. It was entirely rented out within nine months and is now delivering £650,000 a year in rent.”
Lifestyle living
The Collective concept is pretty simple. The company takes on and refurbishes rundown buildings in London to create new, high-spec interiors packed full of as many compact living spaces as the property will allow. And compact is the word. Some of the studio flats are less than 120 sq ft – the size of a standard bedroom – with an entire living quarters squeezed in. But clever design, including floating beds and meticulously thought-out storage options, means that the small spaces do work – especially for Merchant’s target market of young professionals on modest salaries. The properties are clean, well designed and, most importantly, in an enviable London location within a tight budget.
The Camden Collective is currently home to Tim Lowe, the 26-year-old surveyor travelling around London for four months to discover what options there are on a budget of £500 a month all in (see EG 19 July p46) as part of EG’s Lowe Cost Living series. This is where rents at The Collective start. They go up to around £800-£1,000 a month for bigger rooms and in some of the newer properties where there are more amenities.
The rent figure also includes a weekly linen change, room clean and, again in the newer properties, access to facilities including spas and private dining room hire.
“Nowadays, time is everyone’s most valuable commodity,” says Merchant. “So extra services and whatever we can do to save time for our tenants are only going to add to their experience. And I would go so far as to say that we are selling more than just a room. We are selling a lifestyle.”
Merchant now runs three properties in Camden, King’s Cross and Hyde Park, with a new 323-bed development in Willesden Junction due to open in September 2015. This, in the spirit of offering a lifestyle, will include 1,000 sq ft of shared amenities on each floor including a secret garden room, a spa and a disco laundrette.
“We have a pipeline, either in planning or construction, of 1,500 units,” says Merchant. “And we have funding in place to increase that to 5,000 over the next 12 months. So we are now looking aggressively at opportunities.”
The plan is to target zone 2 and 3 locations in London to develop shared living space for people on salaries of between £20,000 and £45,000 a year, “affordable accommodation for people in an earning bracket which the housing market does not cater for”.
Then Merchant will take the model overseas. Within three years he aims to have launched The Collective in New York, where he has already started to build up a network of potential investors, and will then look to other cities where there is a shortage of affordable accommodation, such as Paris, Barcelona and Madrid.
A lot to do by 2017, then – even for someone prepared to take huge risks. But Merchant remains unfazed as he explains how he plans to take London, then the world, by storm.
Student set-up
Merchant first set up his own business, a student lettings company called LDN Student Rent, in 2009 when he was in his last year at the London School of Economics.
“I set up with three friends and we ran it out of the university library,” he says. “We started to build up our own instructions and I would spend my weekends walking up and down high streets where there were flats above shops. I would go in, convince the shop owner to give me the landlord’s phone number then call them up and pitch. I’d say, ‘Look, I have a database of students. I will fill your property and charge you 5% instead of 10%’.”
Slowly the business started to build up and when, in 2010, one of Merchant’s landlord contacts gave him a seven-bedroom house to rent out in Fulham, SW6, he stumbled into the house-share market. “There was no way we could rent the Fulham house out to a group of students,” he says. “It was out of their budget. So we rented it out room by room. Within five days the whole property was fully let and we were making a profit of £15,000 a year – around 75% more than we were making on student rentals.”
Merchant then focused on taking on and leasing out five- to six-bedroom houses on a room-by-room basis. And that is when the company started to see some serious returns. “Over the course of the first three months when we left university we built up a portfolio of about 200 rooms. And we saw exponential growth nearly overnight. Our turnover to the year ending March 2010 was £10,000. In the first three months of year two we hit a turnover figure of £250,000, which rose to £768,000 for the year with a profit of £27,000. So by August 2011 we started buying buildings rather than just leasing them from landlords.”
Positive pressure
Merchant began buying properties at auction, doing them up himself and letting them out within two months. Then he heard about the derelict 50-flat, £3m mansion block in Camden. Convinced the property would open the door to business growth, he decided not to let a lack of capital stand in his way.
With that £1.8m bridging loan leveraged against his parents’ house hanging over him, Merchant was under immense pressure to get the building ready for his proposed September 2012 start date.
“We started on site in January 2012 so I had nine months,” he says, wincing slightly at the memory – the first time he has appeared anything other than serenely calm and impenetrably confident. “I was told by everyone, including all of my project managers and even the guy I bought the building from, that it was an impossible task. But I knew I could do it. I didn’t just decide on a whim it was possible. I had studied the process at length, had gone over the refurb programme again and again. I knew what needed to be done and was pretty sure I could do it if I approached it in the right way. And the bridging loan just spurred me on. Rather than let that pressure get to me, I turned it into a positive and used the fact that my family was relying on me to keep their house as an incentive.”
Merchant concedes he would not go down that funding route again unless absolutely necessary. “I wouldn’t put myself through that stress again, no,” he says.
And so the question of forward funding is an interesting one. Merchant is happy to reveal where most of his upcoming financial backing will come from in broad terms, but won’t go into detail. “It’s a mix of equity we have built up through the existing business and investment from friends and family. I went to LSE so lots of my friends went on to be investment bankers in the City with plenty of disposable income. A Singaporean family we know who own a bank have provided most of the equity for our upcoming schemes and we get development finance from their bank at incredibly competitive rates.
“The way we are structured means that every time we do a new project it is a completely new investment with different shareholders. So we don’t have a centralised entity that holds our assets. But if you look at our plan for 5,000 beds, you are looking at £700m turnover.”
Expansion plans
Apart from his plan to take The Collective global – “I was in New York at Christmas scoping the market and was introduced to a potential jv partner by Savills, which is a good start,” – Merchant is also planning to move into the shared-office market and is currently refurbishing 14 Bedford Square in Fitzrovia, WC1, to launch an office hub by October.
Teetotal commitment
At just 25 years old, some might argue that Merchant has a lot to learn. And it would be fair to say that some of his bigger risks – even the ones that have paid off – suggest this might be the case.
But when asked about his age, Merchant puts forward a sensible response. “You have to prove yourself at any age. But particularly when you are young. It’s about showing people that you are proactive, dedicated and that you stick to your word. The key thing about business is doing what you say you are going to do. And very few people actually do that. But if people start to see you constantly progressing and constantly delivering, they will start to take you seriously. A lack of age and experience can be compensated for by an energy, a drive and a passion. Which I would say are much rarer qualities.”
And as for his role as a disruptor? “It is desperately needed. The current housing market simply doesn’t cater to a lot of requirements. This whole sector we focus on is full of people who, until we came along, really only had the option: to rent some substandard room in a crappy house-share with a landlord who doesn’t really care. And it might be that the older, more established propcos are less able to understand what the newer generation wants and needs. The only way to change is with people like us. People who are the target market but who also have the credibility and funding to deliver.
“I live in the King’s Cross Collective myself. If I am creating a product I need to believe in it and understand the experience my clients are going through. So I live and breathe The Collective. I work from 7am to 11pm and I gave up alcohol a year ago to make sure I had a clear head to focus entirely on my business.”
Taking dedication to disruption to a whole new level.
Watch the Lowe Cost Living Collective video at www.estatesgazette.com/videos
