Why investors are getting creative in Hong Kong’s co-living market

Demand for hip, amenity-rich housing in infamously cramped and expensive Hong Kong has put co-living on investors’ radars.

But difficulties finding suitable real estate – typically other residential properties – has been a major hurdle, even for cash-rich operators, who are having to find new ways to tap into demand.  

One route: acquiring assets built for a different reason, from hotels to offices.

Co-living company Weave’s latest location in Hunghom, which opened in late 2019, was formerly both a hotel and residential building.

In 2019, real estate investment firm ARCH Capital Management made the former Bridal Tea House Hotel into an Oootopia, its brand of serviced residences with distinctive communal elements like shared kitchens, open dining and social areas, and organised events for residents through leveraging hotel assets in its existing portfolio.

The lack of existing en-bloc property means that operators are looking to convert existing properties or built-to-suit development, says Alvin Leung, director for Hong Kong capital markets at JLL and a co-author of a research paper on co-living in the city. “Some like Hmlet, Dash Living and M3 International Youth Community have chosen to go asset-light by leasing, rather than owning, converted locations.”

Co-living has come into its own over the last few years. Likened to dorms for adults, the apartment blocks tend to come with a host of amenities, from communal kitchens to living and games rooms. The target group tends to be students, young professionals, and foreigners looking for shared values and interests with fellow residents, as well as more flexibility in lease terms, facilities and convenience.

It’s proved popular, especially in cities like San Francisco, London and Singapore. In Hong Kong, some co-living operators are recording up to a 80 per cent occupancy rate for well-established co-living projects, which is a strong showing given the current environment, says Leung.

“Investors have shown an increasing willingness to look at co-living, especially given the relatively strong returns compared to other asset classes, he adds. “The difficulty, at least in Hong Kong, has been finding the right property.”

Private equity firm Gaw Capital was one of the first Hong Kong players to venture into co-living when it turned a hotel into a 48-room Campus Hong Kong (now Commune) in 2016. Boutique hotel group Ovolo acquired and converted an office block in Aberdeen on the Southern part of Hong Kong Island first into a serviced block and then into its first “Moji Nomad” co-living facility of 65 rooms in 2017.

Residential buildings, especially old walk-ups or tenement houses, and serviced apartment blocks are preferred because conversion is more straightforward. One operator leased individual units in a walk-up, otherwise known as “tong lau” in Cantonese, from veteran Hong Kong property investor Tang Shing-bor.

With the recent laggard in hotel room demand, investors and landlords are also considering smaller, underperforming boutique hotels and guesthouses that require minimal alterations to make room for the communal amenities that characterise co-living spaces.

“Hotel operators have to fulfil licensing issues and requirements on room capacity, fire safety and the allocation of parking spaces per room, which don’t apply to co-living. We may see more hotels being converted to co-living use,” Leung says.

Since the breakout of Covid-19, en-suite co-living products with private bathrooms are still in demand but units with shared wash facilities are less popular, he adds. 

Converted co-living products can deliver stable investment yields at around 4 to 5 percent, higher than for other core real estate asset classes and enable fund managers to diversify their investment portfolios, according to Raymond Fung, JLL’s executive director for investment and alternative, Hong Kong capital markets, citing JLL estimates. The conversion of older buildings usually provides the greatest uplift in rental income for landlords.

“The barriers to entry are there, but we expect investors to keep up the creativity in the hunt for those yields,” he says.