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HONG KONG

Investments in co-living could improve rental yields by up to 12.1%

Appeal enhanced by housing market which has yet to reach its peak


HONG KONG, 21 November 2017 – JLL today released its "Bridging the housing gap" co-living research paper, exploring the investment opportunities in co-living spaces. Its analysis shows that owners and investors can improve rental yields by up to 12.1% if they opt to convert the existing property into a co-living scheme. Operational improvements and use of financial leverage could boost returns further.

Hong Kong has the world's least affordable housing market and the situation is likely to get worse, with current prices expected to increase at least another 15% in the next two and half years. Rentals for mass residential properties surged 102% between 2009 and 2017 Q2, more than double that of nominal income. 

To those locked out of the housing market, the arrival of co-living offers an affordable solution to their housing needs, an alternative to staying in the family home, sharing a rental unit or living in a subdivided flat. In addition, the community aspects touted by most co-living schemes have the potential to improve the overall well-being of residents.

This has created good investment opportunities in a market segment that used to be overlooked and is typically associated with low quality housing. As young professionals and students are the least able to get on the housing ladder or access public rental housing, they are the two key user groups most receptive to co-living arrangements. Consequently, two distinct types of co-living have emerged: those that target students and those geared towards young professionals.

While quantifying demand is difficult, there are currently 58,500 young professionals and 68,000 undergraduate and postgraduate students who either live at home or need to meet their housing needs in the private rental market. While it is difficult to make estimates on these high level numbers, even 10% of this student population represents significant demand.

Currently, rents in various co-living schemes start from as little as HKD2,800 per month for a bed and can reach HKD20,000 per month for a small unit. The type of scheme adopted by investors and operators depends largely on prevailing rental market trends. In areas where rental levels are higher, it may be more viable to operate co-living schemes designed for young professionals. Areas with lower rental levels will likely be more suited to the student housing market.

JLL has identified a number of elements are critical in the viable conversion of assets for co-living. The greatest rental uplift usually comes from the conversion of older buildings. Higher ceilings (at least 3.5m, or 11.5 ft) allow beds to be placed on a raised over floor, creating extra floor space and increasing the utilisation rate. For the types of building, residential buildings are preferable as the conversion process is straightforward. But hotels and guesthouses with smaller rooms that require minimal alterations may be suitable too.

In terms of ownership and ownership structure, en-bloc properties are able to provide the scale necessary for conversion and remove issues arising from a Deed of Mutual Covenant. Properties that are held and transferred via a corporate entity are preferred as this lowers investors' stamp duty tax burden considerably. Also, properties on land leases that were granted with fewer restrictions are more attractive.

Nonetheless, investing in co-living is not without risks. The growing supply of nano flats of less than 200 sq ft could soak up some of the demand for co-living schemes. "These nano flats are an attractive rental option for young professionals, because most are less than two years old and can be rented for less than HKD 9,000 per month. This means that in some districts their rental price points may be similar to co-living space," notes Denis Ma, Head of Research at JLL in Hong Kong.

Another consideration is durability and obsolescence. The modern fit-out and finishes provided in many new schemes are what makes them attractive to users. Whether co-living schemes can maintain their appeal after several years of general wear and tear is unknown and will depend on how much operators invest in upkeep and maintenance.

Lastly, investors need to weigh up the risks associated with short-term tenancies. Such risks may affect investors' cash flows. JLL's assumptions of higher returns on co-living schemes are based on full occupancy.

 

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