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Co-Living – Opportunities For All | Career- Opportunities

Published on April 14, 2019 by Qasim Naqvi

As an asset class and business model, co-living has a lot in store for each stakeholder group and it offers a unique opportunity to investors, developers, property owners and operators in addition to bridging the gap between what the urban millennial consumer segment want and what they get.

Institutional investors

 In real estate sector, the office real estate market has seen strong demand from investors and good quality rent-yielding office assets have been lapped up by institutions. As ready rent-yielding assets became scarce, investors started looking for retail assets which garnered huge interest since 2016. But the underlying higher risk in retail assets and longer gestation periods coupled with best performing retail assets already having been acquired again poses the problem of lack of quality real estate to invest in.

Due to low rental yields and stagnant property prices, the residential sector is no longer an attractive investment choice. With the home renting market estimated at USD 32 billion investing in the co-living sector presents a new asset class for investors to diversify their risks. Since the co-living model allows sharing of lower utilization areas such as kitchen, living rooms, the design of these products is such that it allows more people to be accommodated on the same floor plate and generate more rental income from it. The co-living sector is at a nascent stage, with low entry barriers a higher rental yield between 10–13% can be achieved. From an investor’s perspective, structuring of agreements and upkeep of assets are crucial parameters to consider before investing.

Real estate developers

Globally, real estate developers have started venturing into the co-living sector with greenfield developments planned for the next few years in locations like Chicago, New York and London as changing an existing real estate product is extremely expensive and time consuming. Also, reverse engineering the vision for real estate buildings is a painful process. To venture in the co-living market with small or mid-sized greenfield developments rather than huge apartment developments or as part of an upcoming integrated township or mixed-use development would be a better way to explore untested waters.

Co-living spaces use high-spec design and technology to create a home for millennials, which provides better space utilization and fills the gap in the traditional residential supply. The macro trends defining the modern young professionals’ expectations from a rental building highlight the need for a co living format as structural design of residential buildings. Instead of micro units or 1 BHK formats where costs of less utilized areas are loaded on to the final product, co-living inventory should be the next thing developers should think about as target end users for both products are the same. Also, it is a huge revenue opportunity for developers as cost of shared spaces such as kitchen, living rooms, etc. is amortized over a greater number of bedrooms than in a traditional residential development. It makes economic sense over traditional 3 BHK apartments despite higher cost and the business model will work on unit economics and early revenues.

Landlord/Property owners

Vacant buildings or to-let premises have traditionally been advertised on property portals or via brokers. With higher rentals quoted for properties near education hubs and employment dominated micro markets, tenants have been wary to commit to long-term leases, mainly due to the large security deposit requirements. This results in many such properties lying vacant for months before they go off the market leaving property owners helpless to find any alternative use of the properties and generate income from the underlying asset. Co-living provides a better use of such available space for an economic trade-off if property owners lease properties to co-living operators for sublease to young students or working professionals. That India has a huge population and a young workforce demographics on the lookout for affordable and flexible living solutions only adds credence to the co-living business model and its potential to make such assets a return generating asset class.

Typically, if the rooms are let out on a double occupancy basis, the rental cost in a high rental micro market is split for bedrooms and helps the operator achieve higher rentals than in a traditional let-out scenario, the benefit of which can be passed on to the property owners. From market interactions with co-living operators, we have learnt that if the property owners invest in redesign and furnishing the co-living space, then the revenue sharing arrangement is typically 50:50. However, if the co-living operator makes a capital investment in the co-living space upfront to redesign the space and add furnishings after leasing the property from the property owner, the ratio changes to closer to 70:30 in their favor. Similarly, property owners of guesthouses, hostels, tuition centers, old hotels, commercial plazas, etc. can partner with operators for alternate use of their buildings and generate higher rental yields through flexible use of real estate.

Also visit: Co-Living Research| Co-Living History

Category: Coliving