Co-living beckons to private equity investors

Singapore

AS co-living gains traction around the world, it is drawing attention not just from young people looking for an affordable, communal way of living, but also from investors eyeing its promises of stable returns and potential for growth amid rapid urbanisation.

Developers may soon have to take note, too, as demand grows for partners who are fully integrated and able to create well-rounded, communal experiences for end-users rather than just brick-and-mortar buildings, says Peter Young, co-founder and chief executive officer of Singapore-based real estate fund manager Q Investment Partners (QIP).

This is because property is becoming more like a service than a commodity in the sharing economy, as people value different experiences and a better living environment over ownership.

"The world is changing. The world isn't about holding assets and ownership, and having long tenancy with a single landlord anymore," Mr Young told The Business Times. "The user groups are more picky, more specialised, and more nimble. In this very quickly changing world, the sharing economy is impacting real estate as well."

QIP is offering Asian investors the opportunity to invest in this asset class through its partnership with co-living developer and operator The Collective, which runs The Collective Old Oak in London, said to be the largest co-living development in Europe. The two companies collaborated for the first time on a co-living project in Chicago in October 2018, and plan to work on more in gateway cities in the US such as New York, Boston and Miami.

"We want to build an investment platform that focuses on co-living and shared living in a way that is scalable, that we can bring to the institutional investor market," said Mr Young. "From QIP's experience in developing student housing, we know about building and creating a product for the end user with an income stream that moves the sector into an institutional space. From an investment perspective, that's our vision for co-living."

While co-living is often portrayed as part of a hip lifestyle targeted at millennials, it reaches a larger user base by addressing other issues like a severe lack of housing supply in major cities and changing consumer habits, such as people choosing to settle down later in life.

The Collective Old Oak's occupants reflect this wider target market, ranging in age from 18 to 60 years, with 25 per cent above the age of 35.

However, The Collective co-founder and CEO Reza Merchant thinks the millennial mindset still figures large in co-living and the way residents seek constant learning and growth through interactions with one another.

The Collective Old Oak hosts 25 events every week ranging from business support and other educational classes to recreational events with musicians and DJs, and has seen businesses start, love blossom and lives transform in various ways through the community.

"Connections and interactions are really what this generation is about, and they are priceless," said Mr Merchant. "What price do you put on meeting your future business partner or your future soulmate? It very much appeals to the mindset of today."

On a more practical note, he also points out that residents at the Old Oak project hail mainly from the growing middle-income segment, with an average annual salary of £34,000 (S$60,850).

"Think about how deep the demand is for the end product. If you look over the long term, the number of people on that middle-income range will only increase with growth in urbanisation," said Mr Merchant.

He added that co-living is not cyclical like other real estate asset classes such as office, retail and higher-end residential. In downturns, co-living could even see better returns as more people look to rent affordable accommodation.

Mr Young said QIP's strategy for co-living involves buying well, developing the co-living buildings on time, operating with the best in the sector and creating an income stream that drives an attractive internal rate of return of about 15 to 20 per cent over about three to five years.

With the asset class's similarities to student housing, he believes Singapore conglomerates that have invested in purpose-built student housing will be natural in-buyers to co-living as well. He also expects other investors to be won over by the lower dependence of co-living on economic circumstances for performance.

"We're seeing a change in family and private clients, from simply investing in a condominium and hoping for capital appreciation, to looking at who they are partnering with and the basis of return that they're likely to get, typically through the development profit or creating something that has value," Mr Young said.

"Recent trends in capital profits in markets like Singapore and Hong Kong are very cyclical compared to some of these value-added things we do, where we've seen performance with 16 per cent per annum returns. That's where I think it's worth a comparison."