The Rising Popularity of Co-Living Assets

Over the last few years co-living has really grown as a sector. Once old buildings have been gentrified, with snazzy new logos garnishing newly refurbished exteriors. Once vacant interiors have been replaced with younger occupants who happily occupy 20-30 sqm rooms with ensuite bathrooms. The rise of co-living has given a new lease of life to once tired, semi-obsolete assets.

What is driving this phenomenon?

From a financial standpoint it's this: The ability for new co-living concepts to drive higher operational efficiency. Numbers are below - quick excel file included here for easy reference.

Co-Living Example - Quick Math.xlsx

Download XLSX • 11KB

Let's look at an example. I recently looked at a hotel asset that was on the market. It was a 3.5 star hotel, valued at approx US$70m.

ADRs were US$130 on a stabilised occupancy of 90%, with about 150 rooms. Ancillary (F&B, parking) income was ~10% of room revenues. NOI margins were ~35%.

Quick math: This equates to

• Room revenues of US$6.40m p.a. (US$130 * 90% * 150 * 365)

• Ancillary income of US$0.64m

• Total revenues of US$7.05m

• NOI of US$2.47m

Based on the US$70m valuation, that equates to a passing yield of 3.52%. That’s pre-any stamp duties and transaction costs for any incoming buyer, which would decrease the yield even further.

Not… great. Compared to interest rates of ~4.50% p.a, that brings any investor into negative carry territory. Yikes.

Several players were looking at converting it into a co-living product. How would the math work? Let’s assume a similar entry price of US$70m. In terms of capex, works would largely be superficial (nothing major/structural such as knocking down walls, replacing M&E, changing the floors), with efforts to spruce up the asset and make the rooms more functional to co-living occupants (hip colours and murals on the walls, purchase of new white goods such as refrigerators and washer/dryers, usage of more warm lighting, a nice youthful looking logo splashed across the entrance to intimidate any potential occupant past the age of 40.. you get the drift). Such works were estimated at US$2.5m. That brings the total entry cost (inclusive of capex) to US$72.5m.

Fairy lights, always a cheap way to make a place look cool / hipster

Assuming similar occupancy of 90%, with monthly rental rates of US$2,600 per month, at an NOI yield of 80%, this equates to:

• Room revenues of US$4.21m (US$2,600 * 90% * 150)

• NOI of US$3.37m

This produces a yield of 4.65% (US$3.37 / US$72.5m) - above interest rate levels and ~1.1% higher than if it was operated as a 3-star hotel!

While the topline fell by ~34%, NOI increased by ~37% - co-living assets are less operationally demanding than hotel assets and hence the path to profitability is less harsh. How so? Well, compared to hotels, co-living products have the ability to:

• Pass on electrical and utility expenses to the end-consumer

• Operate with lesser human resource requirements - it’s more common for multiple co-living assets to be managed by a single area / regional manager than a hotel

• Forsake daily housekeeping for once-a-week housekeeping (anything more is typically chargeable), hence reducing human resource and laundry requirements

• Dispense with the need to provide ancillary services (room service, hotel restaurant, facilities such as a spa and gym)

One of the eye watering assumptions made here is the US$2,600 monthly room rate - that is by no means cheap. However, in several markets (like Singapore), it’s not uncommon to see such rates being advertised for 30-40 sqm rooms. The question to ask is - how sustainable are these rates?

Discussion for another day.