Generating Alpha from the Co-living sector in Asia Pacific

Co-living is more than just a buzzword. It is an innovative real estate concept that continues to disrupt traditional residential and hospitality segments, offering an alluring alternative to more personalised, flexible, community-oriented and social programming activities. Such co-living spaces typically consist of a private bedroom with fully furnished shared common spaces and amenities that facilitate an activated sense of community, convenience and connection.

Examples of these include shared kitchens, coworking spaces, gyms, and other recreational areas. Co-living also prioritises programs such as networking events and curated social activities, fostering greater community engagement.

The co-living sector has become more apparent due to a number of factors (Figure 1). The ever-evolving regional demographic shifts, increased urbanisation and global ‘workforce mobility’ greatly influence how people live, work and play. Together with changing lifestyle and consumer preferences, housing affordability challenges have also altered this paradigm in the co-living sector.

Figure 1: Co-living demand drivers

Over the past few years, the co-living sector has transformed to cater to both existing and new customer profiles (Figure 2). Co-living typically targets corporate working adults or young professionals who wish to reside in key metropolitan cities and seek properties with dedicated co-working facilities as well as lifestyle amenities. It offers a less expensive alternative to traditional housing options, especially for those who are unable to buy or who opt for more leasing flexibility with minimal commitment.

Popular with emerging lifestyle renters, especially among millennials and Gen Z, co-living also entices these target segments who seek a community living lifestyle at a competitive price point. According to CBRE’s Asia Pacific Live-Work-Shop report¹, which surveyed more than 9,000 people in the region, Gen Z accounts for the bulk of demand (39%) for such shared accommodation and around 28% of respondents seeking such spaces are currently living with their parents. This indicates that substantial demand exists in the region for co-living properties catering to young singles and those looking to leave their parents’ house.

The co-living market varies across Asia Pacific, catering to various customer demographics and preferences. Apart from barriers to home ownership due to high residential prices, the disparity in transparency of regulations among different countries will be critical driving factors for co-living . Notably, the sector has been more prominent in developed, higher cost markets such as Singapore, Japan, Australia, mainland China and Hong Kong SAR where opportunistic private investors have been more active (Figure 3).

Co-living operators are still in the process of discovering their market niche. Some spaces focus on young professionals and digital nomads with the provision of amenities such as co-working spaces, networking events and wellness facilities. Others target students and offer accommodation near universities and similar educational institutions. While some have proven to be successful, others have unlocked value via mergers with competitors in order to develop and grow further. For instance, in 2022, Hmlet merged with prominent European co-living player Habyt via an equity share swap as part of a consolidation effort to enhance competitive advantage in the co-living market.²

Co-living, as an alternative asset class underpinned by solid market fundamentals and resilient demand drivers, is gaining interest from certain institutional investors and private equity fund managers as a part of their portfolio diversification and risk mitigation strategies. The sector’s stable long-term rental income yield prospects and asset resiliency has further ignited investor appetite to capitalise on value-add opportunities to strategically calibrate their portfolios (Figure 4). In addition, according to CBRE’s Asia Pacific Investor Intentions Survey 2024³, vintage credit strategies such as distressed asset and debt solutions continue to gain favour among investors, with most credit strategies focusing on non-performing loans (NPLs) from developers or development loans for the sector.

Aside from growing market demand, numerous lenders are providing construction and/or permanent debt capital to co-living developers and owners given their “affordability mandates”. More importantly, the acquisition and conversion of underperforming commercial buildings (e.g. hospitality assets) into co-living properties has been a notable trend that surfaced among institutional investors as part of their aggressive business growth strategy, especially in markets like Singapore and Hong Kong.

Despite still being in its nascency, capital flows into the co-living sector across Asia Pacific showed no signs of abating over the past few years (Figure 5). One example is the establishment of a US$600 million co-living fund CapitaLand Ascott Residence Asia Fund II (CLARA II) in February this year, targeting co-living opportunities in gateway cities in developed markets across Asia Pacific.⁴

Against the backdrop of favourable demographic trends, sustained rental growth opportunities and operational resilience, we expect that investors will continue to focus on the co-living sector as part of their value-add and opportunistic investment strategies.

With interest rate cuts on the horizon expected to spur investment, we anticipate that investors with dry powder will begin to deploy and increase capital raising efforts with acquisition and consolidation opportunities targeted at the co-living sector. Investors will need to consider a range of business operating models that would be viable for their market entry and expansion strategy (Figure 6).