While it has been around for decades in Indonesia, the long-stay room rental business has never been a lucrative venture that has evinced much investment interest or attention.
It is, historically, a way for old couples to earn additional income by renting out spare bedrooms – locally termed indekost or kost – usually to university students or local workers, who would live with fellow room-renters, sharing facilities like toilet, kitchen and living room.
However, over the last few years, rising urbanization coupled with the rocketing price of houses has led to a surge in demand for kost accommodation in the country’s main cities. In fact, a survey from Indonesia Property Watch in 2018 found that almost half of millennials in the capital city of Jakarta prefer to stay in long-term rental apartments.
This has prompted bigger and more serious players to jump into the business, including tech companies who see gaping opportunity to seize in an industry commonly categorised as ‘co-living.’ The latest to enter the fray is Indian unicorn OYO and Singapore-based RedDoorz, which have expanded to the kost/co-living market after pouring tens of millions of dollars into their budget hotel game in Indonesia.
The kost space, however, may present bigger challenges for the two foreign giants, with a number of local startups already starting to gain a foothold in the game, having received venture capital backing to boost their operations. Among them are Mamikos (backed, according to Tracxn, by Kakao Ventures), BaCe Capital-backed RoomMe and Shunwei Capital-backed Rukita.
Fresh challenge for OYO
For these tech startups, the fragmentation, lack of standardization and visibility of kost rooms are the main problems they aim to tackle by working with landlords or property owners to revamp, manage and market their inventories.
The players typically make money through one of two schemes: rent arbitrage, where the operators promise landlords a fixed rent and earn a gross profit from managing and renting out the rooms; and revenue share, where the operators promise landlords a certain level of monthly revenue but do not bear any operating costs.
Mamikos, an industry pioneer that is best known for its kost listing site that claims to generate the “highest traffic in the field”, has only recently delved deeper into the business by managing some of the rooms on its platform. However, it acknowledges that it is not the only one that has identified this as an exciting opportunity.
“The kost or room rental business has always been a promising prospect, especially in the area near campuses, schools, or workplaces. In Indonesia, there are 20 million potential kost tenants and over a hundred thousands of kost owners. A lot of other players see this opportunity and start to take part in the field,” said Mamikos co-founder and CEO Maria Regina Anggit.
OYO is one that has jumped into the scene. Having recently pledged to invest up to $300 million in Indonesia, the company quickly decided that the kost space is an opportunity worth tapping. In October, it launched OYO Life, which looks to replicate OYO’s success in the budget hotel play in the co-living market.
At the time of launch, in typical OYO fashion, the company announced that it already has 2,500 rooms across 8 cities under its management. By November, the company says it was “exponentially moving toward 5,000 rooms covering more than 10 cities.”
“What we observe as the main challenge for a budget hotel and kost space here in Indonesia is that they are not standardized and they have low visibility to customers. Understanding the specific needs for our target customer is the key,” said OYO Indonesia country head Alfian Lim.
While OYO is confident it will be able to leverage its experience in the budget hotel segment to crack the kost market, critics are not convinced. In fact, some believe the company’s expertise in its core business might put it at a disadvantage in its new business.
The customers of a long stay, for one, are very different from those of deep-discounted short stays, which OYO is known for. As far as properties are concerned, it has been much reported that OYO works with landlords using a revenue share scheme, which is understood to be unpopular among long-stay property owners. The commercial nature of the two markets is also different. Hospitality allows players to maximize revenues, while for housing, there is the intervention of local authorities and regulators on improving the quality of living.
Indonesia is not the first market for OYO Life. OYO launched its co-living arm in India late last year, claiming to be “the largest long-term co-living player in the country.” Just over a year on, one of its investors, Yahoo Japan, announced that it has exited the Oyo Life venture, in which it had a 33.9 per cent stake, to focus on other initiatives.
“[Budget hotel and co-living are] Completely different industries, with completely different DNA. And being giants, it is much harder to pivot without losing focus on the bread and butter,” one industry player said on OYO’s co-living plans.
Much of OYO’s challenges also apply to RedDoorz. However, the Asia Partners-backed company seems to have tried to mitigate parts of it by entering the kost business using a different, almost unrecognizable brand, called Kool Kost.
Kool Kost has not been officially launched but has been mentioned in the RedDoorz website, described as affordable monthly accommodations with free wi-fi and guaranteed clean rooms. When contacted, RedDoorz declined to provide more information on Kool Kost.
Capital no longer key
While the arrival of OYO and RedDoorz has not gone unnoticed, it has not stopped some prominent venture capital firms from placing bets on existing kost startups. In October, Ant Financial-backed BAce Capital led an unspecified Series A funding round in Jakarta-based RoomMe, which has been in the game since 2016. Its latest round was backed by Singapore’s Vertex Ventures and KK Fund.
Another player that has secured fresh capital is Rukita, a relative newcomer but one that has quickly attracted global investment interest. In its first round of funding, the startup received capital injection from Sequoia Surge, Golden Gate Ventures, Shunwei Capital and SeedPlus.
Rukita, which claims to specialize in full-stack operations of landlord assets including design, transformation, revenue management and operations, does not compete directly with OYO and RedDoorz as it caters to a market with higher price points. However, it is bound to feel the impact of hiked prices from the supply side brought about by the arrival of the two heavily funded giants.
According to Rukita co-founder Sabrina Soewatdy, the world of tech startups has now started to move away from “growth-at-all-costs” strategy, where capital and speed of execution used to be the primary determinants of success.
In the kost space, for example, the winners will no longer be solely determined by depth of capital, but more on intangible qualities like the ability to build close relationships with both landlords and tenants in order to minimize customer churn and acquisition costs, deep knowledge/experience in local real estate markets in order to make the right picks/investments and the ability to manage cash efficiently in what’s traditionally known as a capital-intensive business.
“Given the existing state of the venture market where investors are increasingly scrutinizing businesses to ensure they “make sense”, I believe that capital will be significantly less forgiving. As such, determinants of longevity in this industry would fall into the ability to maximize margins/minimize losses,” she said.
Apartment-sharing eyes market share
Interestingly, while vying for market share in the kost space, Rukita, unlike its peers, is also tapping into a new emerging co-living segment of apartment co-living, which pits it against a new set of competitors, including Insignia Ventures-backed Yukstay, East Ventures-backed Co-Hive, and newcomer Flokq.
Though these companies target different real state supply to the kost players, they largely fight in the same battlefield on the demand side, as the gap in prices between high-end kost and affordable shared apartment rooms has become virtually non-existent.
“Increasingly we have seen our members/potential prospects aspiring a certain quality that best in class apartments offer. Traditionally the apartments have been unaffordable and offered limited flexibility. With our offerings, we intend to change some of this, and hence we anticipate this market to grow in size at a rapid pace,” said Flokq founder and CEO Anand Janardhanan.
Flokq (pronounced flock), which also provides monthly rentals of private apartment units, puts emphasis on curating like-minded people within shared apartment units and even whole apartment buildings, which would then create micro-communities.
This community aspect, much aided by shared recreational facilities offered by apartments, is one of the elements that contribute to a better quality of long-term stays compared to the kost settings, Janardhanan added.
He will be hoping that apartment co-living in Indonesia will soon take off, as it has in other – albeit more developed- markets. The US has seen the growth of players like Bungalow, which recently raised a $47 million Series B funding round, while in India, Zolostays has enjoyed relative success and is reportedly in talks with Credit Suisse to raise $100 million in Series C round to fund its expansion plans.
Closer to home, Singapore’s Hmlet, backed by Sequoia India, is arguably one of the leading players and has recently secured a $40 million round led by Burda Principal to further expand its presence following forays into Hong Kong and Sydney.
Shaking off WeWork parallel
As far as venture capital investment is concerned, what is interesting to note is that none of Indonesia’s slew of local VC firms has backed startups that focus on the country’s co-living business, despite growing interest from foreign investors.
“It’s an unproven industry. Once there are several successful exits, the local VCs might start looking at this industry more favorably,” said Arip Tirta, former co-founder and CEO of proptech startup Urbanindo, which was acquired by Singapore’s 99.co early last year.
Tirta, an active angel investor and founder of social commerce company Evermos, also believes capital raising for co-living players, in the short term, may be impacted by the recent debacle of loss-making co-working space provider WeWork, which saw it fail to go public and its valuation drastically corrected from an estimated $47 billion to $8 billion.
The event has put scrutiny on the business sustainability of all tech startups, but may have a bigger effect on co-living players, given the perceived similarities between the co-living and co-working business models, which involve leasing, renovating and renting out commercial spaces.
Investors of co-living startups, however, would beg to differ.
Justin Hall, a partner at Rukita-investor Golden Gate Ventures, says that WeWork is, fundamentally, a sound business that has not evolved normally. The company, he observes, received extraordinary sums of capital without first establishing the processes, maturity, leadership, and culture necessary to manage the hypergrowth that came with that investment.
Rukita, on the other hand, operates in a different vertical, he argues, administering far better commercial terms with its landlords, in a fast-growing albeit still developing market.
“To the casual observer, there may appear to be parallels between co-living and the WeWork debacle, but like all things, the devil is in the details: things as simple as sensible execution, good corporate governance, and rational boards can often mean the difference between a unicorn and a disaster,” he said.