Southeast Asian operators bullish on co-living growth prospects but see it as long-term play

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More and more Southeast Asian operators are jumping on the co-living bandwagon despite WeWork’s turbulent market outing and tryst with this asset class.

Asian players are largely placing their bets on the region’s rapid urbanisation, the growing gig economy and the rise of the millennial generation.

“If you look at Singapore, co-living is only about one percent of the traditional rental market. A lot of SEA markets are still low-base. There is room for growth,” said Knight Frank Asia Pacific research associate director Justin Eng.

Alongside the huge growth potential lurks the challenge of upping the game, following the right business model for sustainable growth and navigating the complex regulatory policies governing the region’s property sector.

Despite the recent pressure of Covid-19, key SEA co-living operators interviewed by DealstreetAsia said they would continue to expand this year, given the sector’s long-term growth prospects.

“The situation of Covid-19 is evolving, the impact is still uncertain. But we will continue to actively seek opportunities to expand Lyf,” said Ascott’s lyf Deputy Managing Director Mindy Teo. Ascott is a unit of Singapore-listed property developer CapitaLand.

Besides expanding its brand in existing markets of Singapore, Thailand, Malaysia, Japan, the Philippines and China, the group will explore other markets such as Australia, Indonesia, South Korea, France, Germany, Netherlands and the United Kingdom.

Last year, Ascott invested S$103 million ($74.35 million) to launch lyf Funan Singapore, the largest co-living property in SEA. Spanning about 121,000 square feet in gross floor area, lyf Funan Singapore houses 412 rooms across 279 apartments in the city-state.

The group, which is targeting the higher end of the co-living market, has two more upcoming properties in Singapore and Bangkok this year and expects to open five more properties in Kuala Lumpur, Singapore, Tenjin Fukuoka, Cebu city, and Hongqiao Shanghai, in the next three years.

In the Philippines, the first and the largest co-living player Philippines Urban Living Solutions (PULS) is completing two projects this year. The company targets the middle-income segment, with what it calls its lifestyle-oriented dormitory concept under the brand MyTown. The expansion will see its combined portfolio increase to 4,540 beds by year-end, from its current portfolio of 3,340 beds across 16 owned buildings.

“We see demand [for our product] in other cities across the Philippines and SEA. We are currently focused on our aggressive Metro Manila expansion plans, but our goal is to eventually be a nationwide and possibly SEA lifestyle brand,“ PULS co-founder Jelmer Ikink said.

In 2017, the Philippines conglomerate SM Investment Corp acquired 61.2 per cent stake in PULS. The dormitory chain is also backed by a consortium led by asset manager Franklin Templeton.

“As an asset-heavy co-living operator (we developed, own and manage all our buildings in-house), our break-even occupancy levels are lower than other asset-light co-living players who have significant rent expenses to landlords. Our strategic plans are long-term, and we believe these will outlive the short- to medium-term effects of Covid-19,” Ikink said.

Growth pangs

“There is a growth potential for both high-end and middle-end co-living operators in the region. But for start-ups, the key challenge is how fast they can achieve their economic scale to improve margin, and how soon they can stop burning their capital,” said Knight Frank Asia Pacific research’s Eng.

A key example is Singapore-based start-up Hmlet which has recently switched to the “asset-light” model by adopting a revenue-sharing model with landlords, from directly rent and operate. The switching of the business model has allowed the group to lower its operational risk while expanding its portfolio via more mergers and acquisitions.

“Any business at our stage of growth and maturity must evolve to grow faster and smarter. To better deliver on our journey, we have made difficult decisions impacting a number of colleagues (retrenchment) in order to create the necessary capacity to further enhance our operational efficiency, serve our members better, scale-up in the right areas and accelerate our growth,” said Hmlet’s chief executive and co-founder Yoan Kamalski, adding that the group is still prioritizing its growth over profitability.

The start-up which has raised $48 million from Aurum Investments, Sequoia Capital India, Burda Principal Investments since its inception, acquired ‘We Are Urban’ in Hong Kong and Caper Coliving in Australia in the past two years to fuel its expansion in these regions. It is currently operating in more than 93 locations across Singapore, Hong Kong, Sydney and Tokyo.

Overall, the co-living sector in the SE Asia region remains fragmented with more operators looking for rebranding opportunities to provide niche and complimentary services.

Livein, which has recently rebranded itself to focus on the co-living segment, plans to expand into Indonesia and the Philippines by targeting middle-class tertiary students and young working professionals.

Formerly known as HostelHunting that was tackling long-term room rental issues among students and property owners via its marketplace website, the start-up has raised more than $4.5 million from investors such as Jungle Ventures, KK Fund, Incubate Fund, Wavemaker Partners.

Claiming itself the largest co-living operator in Malaysia by covering thousands of rooms across 10 districts, its chief executive officer and co-founder Keek Wen Khai said, the group is able to be profitable for every single unit it is running under its capital expenditure and asset-light business model.

Amid the growing co-living trend that fuels the emergence of Indonesian homegrown players such as Rukita, Flokq, Mamikos, Outpost, Hustlers Villa, RoomMe, the Indonesian largest co-working space operator CoHive has also ventured into the co-living segment to create an integrated work, live, play ecosystem.

“Co-living is more difficult than co-working because there are many different options available for residential landlords, whether it be short term solutions (Airbnb/Travelio) or monthly rentals (RedDoorz, Oyo),” said CoHive co-founder and chief executive officer Jason Lee, adding that partnership qualification requirements are also high in terms of a minimum quantity of rooms, contiguous layouts and proper titling or zoning.

However, he sees the integration of its co-living and co-working services into its 37 locations throughout the country as a growth opportunity. The start-up which is expected to announce its new funding in the first half to grow its co-living segment has expanded its co-living services to 100 contiguous rooms across three floors, starting from its test product of 27 units on one floor.

Investors are also keen on taking advantage of positive macroeconomic and demographic trends in Indonesia, where is currently experiencing burgeoning middle class, migration from rural to urban areas, and the rise of digital consumption.

“I see a positive impact on unit economics and financial sustainability (on co-living). If the unit economics can be kept under control, then it is definitely an attractive business,” said Justin Hall, a partner from Golden Gate Ventures, which is investing in Jakarta-based co-living operator Rukita.

Potential risks

While growth of the co-living sector is expected to continue in SEA, affordable rental and houses, as well as lack of young expat population across the region, may curb its long-term demand. Government potential regulation – through direct policy on lease tenures or land-use zoning requirements – may also affect the sectoral growth.

“I am less bullish on this region as compared to markets such as Hong Kong, Tokyo, Beijing, Shanghai, where residential prices are more expensive and houses are unaffordable for the younger generation,” said Knight Frank Asia Pacific research’s Eng.

In Singapore, for instance, the government offers subsidised and well-built public housing to its young families for purchase on 99-year leases. About three-quarters of the city-state live in these HDB flats. The residential rental market in other Southeast Asian markets such as Vietnam and Malaysia are also relatively affordable.

Indeed, the demand for the Singapore co-living sector is mainly driven by the young expatriate population, but as Eng points out, this segment remains small in other Southeast Asian cities.

Echoing the views, Savills (Malaysia) research and consultancy director Amy Wong opined that, co-living appeals primarily to young working professionals living in expensive cities that have a huge in-migration of talent.

“Although co-living provides a more structured lease environment which appeals to the millennials, in Kuala Lumpur, the traditional rental market offers a wide variety of residential property types, and various rents to suit different appetites. Its residential rents are one of the lowest in Asia,” she said.

While there are not many regulations stop the co-living sector from growing in the region now, the early crackdown of Airbnb across the world included Thailand, which meant the pace of co-living expansion is unlikely to outpace co-working space, which is less regulated.

“There are more hurdles that co-living operators need to watch out for and price the risk into their business model. Co-living is still a new concept in most SEA markets, operators may get stuck in to tackle all this cost if governments react to it,” Knight Frank Asia Pacific research’s Eng emphasized.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.