Hmlet: a hard lesson in hubris
It remains to be seen if the recent initiatives taken by the struggling co-living operator can fix the problem it has: weak demand amid a highly competitive space
Singapore
REALITY has set in for co-living operator Hmlet. An overly rapid expansion, a cash crunch and a management exodus have forced the company to rethink its lofty ambitions. Its US-listed, China-based peers, which have experienced similar falls from grace, also offer some hard lessons in hubris.
Hmlet, launched in 2016, was among Asia's earliest and most aggressive players in the co-living space. It signed long-term leases with landlords, then reconfigured apartments to sublet for short terms at a premium. In five years, Hmlet muscled its way into six countries and accumulated more than 100 properties on its platform.
But that rapid expansion has recently come to a halt. Hmlet has abandoned an expansion into Malaysia and Thailand less than six months after its launch, hinting at increasing financial strain.
As The Business Times reported two weeks ago, chief executive and co-founder Yoan Kamalski had stepped down. The startup has also lost its chief technology officer and chief financial officer, among a few other top executives.
Hmlet's difficulties appear representative of the industry.
Shares of Phoenix Tree Holdings, the holding company of Chinese co-living platform Danke, have fallen 82.5 per cent since its listing on the New York Stock Exchange in January 2020 to close at US$2.37 on March 15. Trading has been suspended.
It had reportedly failed to pay some landlords their rents, and several property owners responded by trying to evict tenants. The company appears to have ceased operations since Dec 25, according to reports by the South China Morning Post.
Meanwhile, Nasdaq-listed rival Qingke's shares have fallen 86.3 per cent since its initial public offering in November 2019. They closed at US$2.61 on Tuesday. The company came under fire last year after failing to pay rentals or deposits to its users, fuelling rumours of insolvency.
While some of the struggles of co-living operators might be attributable to the pandemic, players also resorted to offering substantial discounts in order to attract and retain tenants in a competitive market.
Danke, for instance, had offered up to 51 per cent off the first month's rent if tenants signed a 12-month lease. Additional rental refunds were also offered for up to two months.
Arun George, an analyst at Global Equity Research who publishes on Smartkarma, noted last year that Danke's rental spread - the average revenue per rented-out unit less the average leasing cost per unit - has been "steadily declining".
Its rental spread for the first quarter of 2020 was 517 yuan (S$105.8), down 17.4 per cent from 626 yuan in the same period of the prior year.
"(Danke's) unit economics are under pressure due to a risky strategy of handing out large discounts," said Mr George. "This runs the risk of ingraining residents with the mindset that discounts are the norm, making it harder to lower discounts and improve unit economics."
With deteriorating margins, Danke's net loss in the first quarter of 2020 widened to 1.23 billion yuan from 816.24 million in the year prior. This was despite a 62.5 per cent rise in revenue to 1.94 billion yuan.
In Singapore, Hmlet appears to have listed some of its vacant rooms for a lower price compared to similar units on the market.
For example, a master room at One Shenton on Hmlet starts at S$3,000 a month. Similar rooms on PropertyGuru list for S$3,300 to S$3,900 per month. The startup has recently been offering customers up to S$600 off for a 12-month lease.
Part of the problem could be Hmlet's aggressive expansion, which has made it necessary for the company to offer discounts in order to achieve certain occupancy ratios.
Even as the sharing economy flailed during the pandemic, the startup went on the offensive. In 2020, it onboarded new properties in Tiong Bahru, acquired Thai listing platform Flat Monthly, expanded into Malaysia and Thailand, and widened its product offering to include interior design, furniture and property listing services.
Former CEO Mr Kamalski told BT in September last year that with Covid-19, several big developers were approaching the startup with "a good amount of quality stock on hand, to explore partnerships and business opportunities".
"It is now up to us to help developers get both expatriates and locals into these buildings," said Mr Kamalski then.
It turns out, getting people to fill these rooms in the midst of a pandemic was difficult. To maintain cash flow, Hmlet cut prices and dangled discounts for longer leases. But occupancy rates continued to fall.
Sources told BT that the average lease period in 2020 was about 3.5 to 4.5 months - barely above its minimum lock-in period of three months (for most apartments) - and that Hmlet has burnt through US$38 million in capital since its previous fundraise.
Its last announced fundraise was in July 2019, when it secured US$40 million in a Series B round led by Burda Principal Investments with participation from existing investors such as Sequoia Capital India.
Sources said existing investors have since committed more funds in order to extend the startup's cash runway. Last week, Hmlet laid off more than 20 employees in middle- and upper-management roles in an attempt to restructure and manage costs.
New interim CEO Peter Kennedy, a senior investor at one of Hmlet's biggest backers Burda Principal Investments, told BT that the key focus of its new management will be to "increase the average selling prices and margins of its properties".
He added that the startup will also try to "maintain high levels of member experience and NPS (net promoter scores)".
It is unclear how useful such initiatives will be when it comes to fixing the problem Hmlet has: weak demand amid a highly competitive space. It is not easy to raise rental prices in the current environment, and that might hold true for some time to come.
- Garage is BT's startup vertical. Read more news, analyses and opinions at bt.sg/garage
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