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Spencer Levy
With a need for housing, especially affordable housing, a challenge around the globe, one emerging asset type is on the rise. Operating on the fringes of hotels, multifamily, student housing, and other forms of flexible or extended stay residential, it defies easy definition. Yet among investors and developers, growing international interest is riding a wave of activity that we're about to dive into. On this episode, a pair of leaders from overseas open up the wide world of co-living to unpack the fundamentals and opportunities in this niche residential space.
Stuart McCann
It is a nascent, but very growing sector with a lot of momentum behind it.
Spencer Levy
That's Stuart McCann, Managing Director with CBRE Capital Advisors in the Pacific and Southeast Asia. Based in Singapore, Stuart is responsible for facilitating cross-border investments in the Pacific region.
Sabine Schaffer
You have about a million people on a weekly basis moving into urban environments. We do not have neither the space nor people really have the money in order to afford two or three bedrooms for every person that's moving.
Spencer Levy
And that's Dr. Sabine Schaffer, Co-Founder and Managing Partner of Pro-invest Group, an enterprise established in 2010 with interests around the world. Pro-invest is a vertically integrated firm that has investment and ownership, development and operations all under one roof, with a focus on hospitality and residential and a multi-billion dollar foothold in flexible or co-living across Europe, Australia and Asia. Coming up, we revisit an intriguing asset type that's all about small shared living space but which may be primed for big time growth. We'll find out. I'm Spencer Levy and that's right now on The Weekly Take.
Spencer Levy
Welcome to The Weekly Take and we're delighted to speak with two friends of ours that are overseas starting with Dr. Sabine Schaffer. Sabine, thanks for coming out.
Sabine Schaffer
Thank you so much, Spencer, for having me.
Spencer Levy
And then we have our own Stuart McCann.
Stuart McCann
Thanks, Spencer. It's great to be here.
Spencer Levy
So, Sabine, thanks for coming out. We're talking today about investing in co-living. And this is actually our second show on co-living. But tell us what co-living is and what you're doing in the sector.
Sabine Schaffer
You know, you're asking five people about how to define core living and you're probably about to get 10 different answers, right? For us, co-living is effectively very similar to a kind of micro-living whereby you have a self-contained unit upstairs, in our case, normally a room size or studio size of about 20 to 25 square meters, sometimes slightly larger, you have a bathroom separately, obviously, for you and you also have a kind of kitchenette area. Then on top of that, downstairs, you have a quite large, very generous communal space area where the target audience will find things that they really cherish and care about and that will include things like gym area, some kind of co-working spaces, a little bit of an F&B offering, more like a cafeteria style. And then simply also just spaces to hang out, maybe a film room. And that's really what the overall, I guess, idea is behind co-living. Normally those buildings and assets can be found in the heart of quite large gateway cities where it is difficult to find affordable living, to find the right balance between work-life. Balance and the advantage of the co-living concept is that you are able to not just have a smaller studio upstairs, but also whenever you feel like you want to have social connections, social connectivity, meeting up with friends, et cetera, et cetera. You simply go downstairs and that's where effectively your social community can be formed. Obviously there is service department offerings, there is extended stay offerings, but from our perspective, what makes co-living so attractive in particular for the, I guess, younger generation is exactly that kind of social side to it and being well-located in some of the core gateway cities and areas.
Stuart McCann
From my perspective, that sums it up really well, Sabine, but probably the other differentiator that we see as relating to the co-living sector is the length of tenure across the accommodation or housing sector. At the shortest end of the spectrum, you've got hotels where you're really looking to stay for a couple of nights, to your point as well. Then you're stepping out to service departments, maybe Airbnb where you might be looking to rent those for a couple of weeks. And then where we see co-living really stepping in to fill a void in that housing and accommodation gap is really where you can take a bit more of a semi-permanent style of accommodation profile for co-living. It might be a week, it might be three months, it might get up to six or nine, or even up to 12 months in terms of tenure. And then that starts to differentiate itself a little bit further again, when you're comparing it to the multifamily or the private rental market. Which generally might be a one or two year lease contract too. So, I think that length of tenure together with that service offering, that community sense that you get as associated with staying in a co-living facility is also a really big differentiator too.
Spencer Levy
What's interesting, in addition to the episode we had on the show on co-living a couple of years ago, we had an episode about six months ago on what we call here in the United States extended stay hotels. And an extended stay hotel, to your point, Stuart, has elements of what we're talking about here today where the typical length of stay in a hotel, a traditional hotel in the United States is one to three nights. A typical stay in an extended state could be one to 3 weeks, could be three months. In this product, co-living, which you're suggesting, it's closer to that extended stay model where they could be a week, a month, six months, a year, as opposed to multifamily, which is a year to two years. Is that a fair way to summarize?
Stuart McCann
Yeah, that's spot on. That's the – that's exactly where by definition, we're seeing co-living playing that role in the housing combination sector across the markets in Asia.
Spencer Levy
Mhm. In that sense, this was the very same conversation I had with Extended Stay. And I say this, this is not a disrespectful comment. This is a definitional one. Are you housing or are you a hotel?
Sabine Schaffer
And I think the answer from our side would be, given that we have as well a number of hotels within our portfolio, clearly we are more on the living side than on the hotel side. And you are right, it is a bit of a blurred line from a definition perspective. However, the argument is that, you know, exception approves the rule, but you normally don't find people staying for six or eight months in a hotel room, right. So, that's normally not what is the case. And even extended stay, I think, comes to its limit there. For us, about 80% of our customers are going to be staying three months plus. The median stay sits at about eight months in general. So, I guess that's how you define it. And, also, maybe one word why you normally don't go beyond the 12 months is because co-living is not being seen as full-fledged residential, but that also brings some advantages. And one of them, for example, would be that you're not falling after into the novel housing act, which means that if for any reason a tenant is unable to pay the rent. When you are seen as being full-fledged residential, it will be rather difficult in order to exchange a tenant. And as a result as well, you have to take quite large deposits of two or three months time. In the case of co-living, if somebody is not willing or able to pay the rent, you're able to exchange that person within let's say a week's time. And there's really not an awful lot that from a legal perspective that can be done. And as result as we only have to charge something like two or weeks of deposits. That defined limit of let's see up to 12 months. As well comes with some advantages, which I think more and more institution investors are interested in, given that, as probably people are aware, there are some discussions around rent caps in place. And, so, from that perspective, co-living is one of the asset classes that would not fall under any potential rent cap kind of scheme.
Spencer Levy
And that was the same basic point of view when we talked about extended stay hotels. This is a math warning for our listeners, because we're now going to go into why hotels and housing are looked at differently by the capital markets. And the basic math for hotel versus multifamily financing is that hotels are typically valued at significantly lower than multifamily because of the shorter term nature of the lease. And, also, because they don't have the same financing options. So, there are advantaged to being characterized as housing, multifamily housing, from a value and financing standpoint, though there are significant disadvantages as it relates to the regulatory nature of landlord-tenant relationships. I think that's the balancing act. Stuart, how do you see it?
Stuart McCann
Yeah, look, I think in Asia-Pacific in co-living from a valuation or asset pricing perspective, the sector is still finding its way. I'll talk about it from an Asia-Pacific perspective. If you actually look at the volume of transactions in the region over the last five years, only 6% of transactions have been across the living sector. And when we talk about living sector, we're talking about built-to-rent, student accommodation, co-living. And, so, it is a nascent but very growing sector with a lot of momentum behind it. If you compare that to the U.S., you've got 44% of volumes over that same period being in the living sector as well. So, what I would say, Spencer, is that you've got in the U.S. side of the market, a lot of clarity and data points and consistency around how the categories of living have been pricing in that region. But in the context of valuations and how cap rates are being put together in the Living Sector in Asia-Pacific, I think we have seen the occurrence at the tighter end of the cap rate end of the spectrum, centered around the multifamily product that's operational and pretty well established up into Japan and equally into the Australian market where there are now good levels of multifamily products that is operational and starting to trade. And those longer term lease contracts and also the more generic style of product mix in terms of traditional ones, twos and three bedrooms, which relate very much from a product design perspective to the traditional private residential market that has traded at probably the tighter end of the cap rate model. As the lease tenure has gotten longer and there is less churn and cost to acquire your customer and there is greater length around that tenure, that's where we start to see cap rates widen slightly through those sectors. And, so, I think you're absolutely right. So the tighter into the spectrum is really that multifamily built-to-rent end of the spectrum. You then seeing cap rates starting to widen slowly into the co-living sector and then starting to widen further into the service department sector and widen again out into the hotel end of the spectrum as well.
Spencer Levy
And just generally speaking, how are the capital markets today in Asia, generally and then specifically for co-living products?
Stuart McCann
Generally speaking, I think in Asia-Pacific, we've got some very strong tailwinds and you've also got a dynamic in our market where trying to access living capital markets product. It's quite scarce. And, so, we are seeing across our transactions in the region for Asia, that if groups have got control of opportunities that they're working through diligence on in this part of the world, while they might've tapped the brakes and tried to slow down and buy a bit more time in our processes. We haven't seen a pullback of the intent of groups willing and able to transact. And, in fact, in the last couple of weeks, we've seen a renewed level of confidence around pursuing and proceeding with some of those transactions that groups were looking to deploy around. So, I'd say that we still have a good degree of confidence around executing around living products, which is really one, the strong tailwinds of the sector, but also the scarcity of the product. And, so, groups aren't wanting to lose control of opportunities if they're in the right position around. And then as it relates to our debt capital markets across the regions, look, we are seeing particularly in markets like Australia, our three and five years swap rates are really starting to come down off the back of the recent activity across the capital markets, which is actually creating an environment where you're starting to see some attractive all in debt pricing relative to where we were 12 months ago, which we think will continue to support transaction activity, particularly in markets, like Australia as well. And more broadly across the region, the debt capital markets continue to have a lot of liquidity and a lot of the big lenders are actually looking to deploy more and more capital into the region at the moment. So, without being too optimistic, Spencer, and being measured about it, we are pretty optimistic around the equity and also debt capital markets in this region.
Sabine Schaffer
And what we witnessed effectively taking shape over the last 12 months is the fact that people see in particular Australian residential and living as a high conviction theme while maybe 12 months ago, everybody was more looking into the credit space. I think nowadays they're happy to take equity in hand when it comes to high conviction areas. The other thing is that there is still some level of, I guess, nervousness when it comes to things like ground-up development. So, in other words, how do you get to the product? The finish point is something that everybody would love to buy. And I think this is another area where we are differentiating ourselves with the way we are delivering our co-living products, which is not necessarily for ground-up development, but our focus is very much on the conversion of existing standing assets, either in the form of old hotels or C-grade office space, and that basically allows you to benefit from two things. One, the ability to buy standing assets that are normally trading below replacement value nowadays. And secondly, obviously you have a much shorter time into the market because you don't have to start with a DA approval from a ground of development perspective, which takes you anywhere between two to two and a half years in Australia. And then, thereafter, you have to look out for your construction contracts and the actual construction itself, which probably takes another two years out. So time to market as well as – I guess, have less of a risk profile through conversion of assets rather than ground-up development is another theme that we believe more and more institution investors are interested in.
Spencer Levy
Let's now shift to the basics here in the U.S., and there's a couple of ways you can do these products. You can do from the ground up. You could start with an existing hotel and convert that hotel into a co-living product. And, then, the one that gets a lot of press and attention today is you take something completely different like an office building, and you convert that into a co-living product, and as you go down that spectrum of ground-up, convert a hotel, converted office building, it gets more complicated, more expensive. How do you view the opportunities in each of those three segments, Sabine?
Sabine Schaffer
In theory, you can use all three avenues in order to come to your product, but it's a fair statement that probably ground-up construction nowadays. I don't want to say it's cost prohibitive, but unless you have a certain angle, let's assume you can buy a site with an already existing DA approval that obviously helps to significantly shorten the timeline. That obviously would help from an IRR's perspective. Similarly, if you can obviously get something like gross maximum price contracts in order to get your hands around that. But, as I mentioned for us, we're absolutely capable of doing that. We did this many, many times around for some of our hotel products. But, at the moment where we are in the cycle, we believe that conversion of assets is simply more attractive. Gives you a better risk return profile. And you're right, logically, it's probably easier to convert a hotel simply because if you look at the actual studios or units upstairs, we're not proposing to move walls around. We are basically proposing to leave the bathroom exactly there, where it is. So, when you talk about a conversion of a hotel from a physical perspective, you need to ensure that the kitchenettes kind of fit inside and cater to that. And, then, obviously there is going to be, I would say a larger repositioning activity will take place downstairs. So what a great room area is of a hotel, but that is it, right. Now, when you talk about a C-grade office, as you can imagine, this is much more difficult. First of all, I appreciate there's a couple of, let's say obsolete office towers throughout a lot of gateway cities. The problem is that the floor plate, if it's too large, effectively what happens is that, given the fact that you need daylight, don't forget why these are definitely living units, if it is too large of a floor plate the inner void becomes so large and inefficient that normally they don't lend itself for conversion. So you have to find a property that has a smaller floor plate to probably something that may be even older. So the one currently we're dealing with in Australia actually is a building that's almost a hundred years old but happens to have the perfect floor plate. Um, so that's one thing to keep in mind. And, then, the overall repositioning will be more expensive, most likely, because it's going to be more intense than a hotel. However, the two reasons why it still is attractive is because first the price point for a C-grade office is pretty low nowadays in today's market, right? So, you're probably able to get a better price point than buying the operating hotel. Number two, the location. If you're talking about core CBD locations. There is still a quite high chance that a hotel may still be highest and best used as a hotel, while a C-grade office may no longer be highest or best used from an office perspective, but rather let itself to conversion. From our perspective, we are capable to do all three, to do ground-up development as well as conversion of hotels, as well conversion of offices, office space, but the focus at the moment is clearly on the latter, so conversion of hotel and office space.
Spencer Levy
Got it. Now Stuart, a lot of the equity players have gotten a little bit more conservative in the last six, eight weeks than they were before. But, notwithstanding, Sabine's point of view on conversion being a great option, where are the capital markets in terms of just the capital generally towards coming into this type of conversion or otherwise and then specifically for these product types?
Stuart McCann
I think what we're seeing in the capital markets is that this sector, because it's so nascent, you've got to create it in this environment. That's where we're seeing a lot of activity by the big private equity players coming into the sector today and really backing groups like Pro-invest on these style of strategies, whether it be through ground-up development or these conversion strategies. And look, the big play for some of the groups coming into the sectors is really trying to create scale. Create scale relatively quickly, hence why these conversion plays get you to income much quicker and build out an operational portfolio so that you can ultimately create an opportunity for core capital to come into the co-living sector in the next iteration of the sector. I think that's the big play by the big private equity groups coming into the market today and that's really a bulk of the capital commitments that have been made into the sector today. If you go around the grounds in Asia-Pacific you've had commitments across the co-living as well as multifamily strategies. KKR are backing Weave in South Korea. You've seen big commitments by ICG up in Korea. PJM has been looking to deploy into co-livings strategies in Hong Kong, Singapore, Australia. You've seen CBRIN active and taking a relatively early-mover at play into the Aussie market from a co-living perspective. And, so, yeah – I see the opportunity that private equity players are doing is building scale, building a portfolio that becomes operational. And in the next couple of years, once those portfolios are up and running, we actually think then it's going to be an opportunity for more call money to come in and take that private-equity capital out. And, so, that's where we're at, Spencer, in the capital markets generation for co-living as a sector in the region.
Spencer Levy
So, Sabine, I'm going to go back to my original episode, and I made an analogy of what co-living is. And I said, it's senior housing for younger people. Basically, you have a unit that's smaller. We're talking about units that are 250 to 350 square feet, which is about the size of a typical American hotel room, but is about double the size of a typical hotel room in Asia and the UK. But then you have these big common areas. Tell us about the mix of amenities that you have in these buildings and the percentage of the space that's used for these amenities versus the actual living space.
Sabine Schaffer
I think you're right. I quite liked the analogy. It is correct, right? In our case, while we're saying 20 to 25 square meters, sometimes slightly larger, because obviously if you talk about all the hotel rooms, they, by definition, were slightly larger than 25 square meters. But on top of that, we are normally adding anywhere between three to four square meters per unit downstairs into the common areas, right. So, that gives you – obviously depending then afterwards on the total asset size, but this gives you normally a fairly generous communal space areas for people to enjoy, to socialize, to use the gym facilities, as I mentioned before, the shared working stations, some F&B offerings, etcetera, etcetera. Now, in terms of amenities or how we decide which amenities we're offering, that again will depend on what our audience looks like. And I guess that's probably logical and nowhere different from the way how whenever you position your hotel, you will also have to think about what amenities this hotel come along with, depends as well on the audience you try to cater to. And this takes us to the target audience. So, for us, the early 20s to the early 30 year olds, all the way up to even young couples, if they want to, if they still want to be mobile, move around to maybe cities and also maybe save some money in order to eventually be able to make a down payment for their own place. So, this is the target audience. And if you put yourself back to that age, I know it's probably hard for everybody here today on this podcast.
Spencer Levy
Speak for the record.
Sabine Schaffer
Yes.
Spencer Levy
I have never left that age, thank you for asking though.
Sabine Schaffer
Okay. Fair enough. Fair enough. Okay. You stay young forever then, which is great. But at that age, what is important to you is what I mentioned. It's to live in a place that's conveniently located, that's probably close by to work or whatever else is important. That gives you the ability to socialize, to be together with your mates, with your friends and to hang out. And, that, all-in is not going to be an awfully expensive proposition. What we are not going to do is offering things for the sake of being able to um, let's say, improve the rent, right. And what I mean by that is, I know that in some BTR offerings, you have things like private concierge services and private dining areas. And these are all fantastic if you're probably part of a slightly older age group or if part of is at the income level, that way you cherish those things. But from our perspective, when you're in your 20s, you're more worried about not the private dining, but when I was at age, I was more worried about corn flakes and where are we going to on a Friday night, to what kind of bar, right. That was more what you're really worried about, let's be honest. And that's exactly what we're going to be catering to. So, horses for courses, if you happen to be in an area where, for example, more students, because naturally, every co-living product closer by to university will also automatically attract students. Then you may have, as I mentioned to you, maybe some movie facilities or a movie room or whatever the case may be. So you adapt slightly, but you keep it down to amenities that that age group is cherishing. And on top of that, what comes along with every unit is free water, free internet, and free electricity, which is also something where the co-living as a product is obviously differentiating itself from, let's say, the normal private market 12-months residential lease agreement where you have to come with your own furniture. You have to connect your electricity, water, internet, etcetera, etcetera.
Spencer Levy
So, these are fully furnished units?
Sabine Schaffer
Absolutely, yes.
Stuart McCann
To add to Sabine's point around the occupier and the customer demand and the profiling, we've spoken to a couple of the largest set of operators around the region and, and what's coming through is that there is a level of consistency and alignment of, of the style of customer that will come here because they do want to buy into that community element that co-living brings and that social element that the co-loving product offering brings. And speaking also to a number of the operators today, in terms of where the customer demand is coming from, it absolutely is coming from the working professionals. But interestingly, across Asia, it seems to be pretty consistent that there's a large spread of international students coming into the co-living sector as well. And look, that's really probably been underpinned by one, the product form is similar to PBSA, not entirely, but similar. But, also, I think across Asia, the PBSA sector is relatively undersupplied as well. And then I think from a business to business perspective, what's coming through in terms of the demand and tenant take up is also big corporate contracts that are starting to come through into the co-living sector as some of these bigger corporates are sending groups into markets for projects, relocation, short-term assignments, and really looking to take more extended bookings as well as. The sector has been a beneficiary business to consumer style of marketing and customer, you know, profiling, but also business to business as well. And I think that's a pretty exciting part, given the quality of the covenants, stickiness of the tenant, but also that ability to take out larger tranches of space through more corporate contracts as well.
Spencer Levy
So, I hear my producers ringing in my ears every time I hear an acronym, PBSA. Is that student housing? What does PBSA stand for?
Stuart McCann
Student housing. Purpose-Built Student Housing.
Spencer Levy
Let's go to the rent. What do you charge for rent here versus you would charge in a hotel versus what you would charge in a traditional multifamily?
Sabine Schaffer
When you look at our products, the way how we decided to find the right price point is as follows, we do, generally speaking, have about three types of customer, depending on the length of stay. So, we say there's one group that stays three months plus, and that obviously then would be more or less competing with, let's say, student housing. Then you have your one to three months, which normally would be competing more with the service department offering. And, then, you have also those who stay less than one month. For us, that's not the target audience necessarily, but if you have somebody who stays with you for six months and then in two weeks time, if somebody coming for seven or nine months, then in between, we're not just going to leave the unit doing nothing, but we're going to continue to yield the asset and obviously as a result as well at a higher price point. So, then, along those three categories, whereby 80% of our customers are staying three months plus, 10% is one to three months, and then the last 10% is below one month, you would try to, on average, be between 10% and 15% below what a competing asset looks like. So for example, to three-months plus –
Spencer Levy
Pause there for one second. What percent below a competing product?
Sabine Schaffer
Um, so, 10% to 15% below, if it's three months plus below, for example, student housing. If there's something like student housing around us, then when you look at the one to three months, again, we try to be in about 10, 15% below the service department and then everything below one month, where again, we're trying to be obviously also more price sensitive than what you would normally find in your normal extended stay or hotel offering. That's the rule of thumb from our perspective. And the reason why we're able to achieve that is because if you compare, for example, to student housing. We're not ground-up developed, right. And as a result, I guess, there are kind of less costs. But the important thing is not just to look at the price point, but you also have to take into consideration why this product is such a – I would say, quite competitive and attractive for investors is the level of occupancy you can achieve. If you look at the level of occupancy on average from a hotel's perspective, nowadays in Australia, if you're achieving an average of 75%, you're actually doing pretty well, right. If you're talking about co-living, normally we're talking about a stabilized occupancy that sits more than 95%. And the ramp up here, the same thing, while it takes a much longer period to ramp up the hotel. If you look at evidence of some of the co-living products that came on the market lately, indeed it only took a couple of weeks in order to effectively fill up the co-living unit.
Spencer Levy
This is where I would say that math really is important. The reason why hotels are, and again, I'm not trying to diminish hotels. I love hotels, but the math of hotels versus multifamily has to do with the transitory nature of the typical tenant. You mentioned, Sabine, that you're getting 75%-ish occupancy in hotels. You're getting 95%-ish occupancy here in co-living. That is apples and oranges from a capital markets perspective. If you have stability of 95%, that's going to materially improve the value of the asset, materially reduce the cap rate, even if all the financing options aren't available. Is that a good summary of why this segment is so attractive versus, say, traditional hotels, or is it an addition to traditional hotels?
Sabine Schaffer
The way we see the value sit and what also values are telling us while on average, obviously, depending on the location, a hotel may sit at a six cap rate. If you talk about a co-living product in the same area, you're probably more talking about a five cap rate, right. And absolutely. So this is a way of how obviously you create additional value. And this is again an example where arguably an old hotel in that area is no longer highest and best use, but rather as a living product. And that's one of the reasons why you would do the repositioning.
Spencer Levy
So, Stuart, let's talk for a moment just about geography. You opened the door to this earlier in our conversation talking about some of our clients buying in South Korea, buying in Australia. Tell us about some of the markets that are attractive and why.
Stuart McCann
The overarching driver of depth of rental accommodation and customers across Asia-Pacific is affordability at the moment. So, if you think across our big markets of Sydney, Singapore, Korea, Tokyo, Hong Kong, the average time to build up a deposit to buy a house or an apartment is around 23 years. That's much wider than what it is in the UK and pan-Europe and also the U.S. and I think the U.S. is sitting around sorta 17 years. And, so, affordability is driving more and more people into the rental market. And we've also got this massive macro driver where our population of Asia-Pacific is looking to grow by another 450 million over the next 25 years. So, we're not building more land unless it's reclaimed land, but that takes a while in this part of the world. Um, but you know, you're going to have, you know, demand outstripping supply on what is already very, very challenging to access that sort of accommodation stock to buy. So, that's probably the big macro trend, which is really driving the demand side of the equation. And, then, I think if you get more micro on a country by country basis, each of the markets across Asia have various nuances to call out a couple. We have seen a lot of private equity and global investors play on the South Korea market in Seoul. And I think the nuance with that market is really just the way that they actually operate their rental model stock as well. They have traditionally run the Jeonse system in Korea, which basically means that if you are a renter, you actually need to get the landlord anywhere between 40% to 60% of the property's value to put into their bank account during the term of which you occupy the premise. And, then, when you are finished with the rental of that apartment, they give that deposit effectively back to you. So you think about that system. Not everybody in this world can actually put up $500,000 just to occupy an apartment for a period of time to the ultimate, sort of, landlord. And so, where the co-living business model is really starting to take effect in that market is that you can create a product which has got flexibility of tenure, flexibility of being able to do monthly rentals and also flexibility about being able to get in there and have all of your utilities, fully furnished product. Security of tenure, that is a massive point of difference to the traditional rental model in that market. And, so, we're seeing a lot of capital move in behind players and setting up platforms in that market to really tap into that alternative to the current rental model. I'd say the other big market, which is having a lot of success across Asia is Singapore. Singapore is really one of the most expensive places to rent private property. It's been through a period of soaring residential rents. It's also a market that's really hard to buy product in, particularly as a foreigner. They've put up stamp duty surcharges for a foreigner in that market in excess of 65%. And, so, it's a pretty big number to go and buy stock. There are also, which is quite an interesting dynamic at the market, there are also a number of older style of buildings that have probably run out of their economic life in their current format of office, low format, low rise, medium density style of office assets, so it really lend themselves to repositioning too. So, we've seen quite a few brands and platforms set up in Singapore to tap into that depth of rent and model tap into the ability to actually access a stock that is no longer acting in its highest and best use and do refurbishment strategies as well. And that's been a market where there's been a lot of success and look, I think in Australia, while the sector is probably a little bit more nascent. There has been some early movers taking advantage of the trend to try and leverage that opportunity to enjoy a better quality style of rental, which has got all the elements that we spoke about in terms of flexibility of tenure, and also that ability to be amongst like-minded people in, you know, a community environment. And that's also having a lot – the sector's also getting a lot of tailwinds in the Australian market because the residential vacancy rate in that market is sitting at around one to two percent and construction costs in that marked have moved 40% to 50% in the last couple of years off the back of COVID. So, bringing on new supply is really challenging. And, so, for those dynamics, the Australian market has been having a lot of success in this space as well.
Spencer Levy
So, let's talk about the long term. Sabine, how do you see the long-term demand for co-living?
Sabine Schaffer
The general feedback is, yeah, it's a really fascinating area, but can you show us benchmarks? And what about the last 10 years track record, etcetera, etcetera. Well, the fact is that because of the nasancy of the industry, it can be compared to where – let's say student housing was some 15 years ago. Fifteen years ago, they didn't say a PBSA, they said student housing. There was a lot of definition about what is student housing, right? Is it just a shared apartment or do you have your own bathroom? It wasn't well-defined. Today, it's one of the, I guess, mainstream asset classes of real estate, right, it's no longer a niche asset class. Similarly, if you take that same logic forward for what we to discuss today, for co-living, what it means is you have about a million people on a weekly basis moving into urban environments. We do not have neither the space nor people really have the money in order to afford two or three bedrooms for every person that's moving, right. So, that just doesn't work. So, the trend has been, and we see it, as Stuart pointed out already, in many larger Asian cities, is to go smaller. And, so, if you follow the logic through, I absolutely see no reason why co-living would not be able to at least see the same growth as you saw with student housing or PBSA over the last 10 to 15 years, and even more so, I guess the advantage of co-living is that you have a wider audience to talk to all the way up to the – when we did our consumer research to the empty nester. So a divorced woman, unfortunately, the kids are out of home. She doesn't need a two or three bedrooms. She wants to be mobile, move around, see the world. There is so many different potentials for that product. And that in my mind also helps to diversify the risk because you do not have just one single target audience, but you have wide audience you can speak to as long as you're able to provide the right amenities and cater to what those people are asking for.
Spencer Levy
How do you see it, Stuart?
Stuart McCann
Yeah, look, I've seen the student accommodation sector perform in a similar way, Spencer, over the last, say, 10 to 15 years. It's been through its development phase with a lot of development capital coming the markets. It's now transitioned into its operational phase and we've seen a number of the big development vehicles now transition into long-term core vehicles going forward and the caliber of the capital coming into those core vehicles into the market today, it's all your big blue chip global LPs. Scape in Australia has been a big leader of the evolution of student accommodation in Australia and also taking a very market leading position also in the Asia-Pacific region. Interestingly, as a great case example of what they're able to do is that they just converted all of their series of development vehicles into an open-ended core fund in Australia. And a caliber of capital that sits in that vehicle is largely a number of your Canadian LPs. You've got North Asian sovereigns. You've European insurance capital in there. It is absolutely blue chip. So I think the trajectory for the co-living sector is, as we touched on earlier, as this private equity capital aggregates, accumulates portfolios, we will expect to see the sector stabilize, mature – and then the more core LP capital, we expect to take these positions on a more stabilized core basis going forward, which we think is a pretty exciting evolution And we've seen a play out over time in the Australian PBSA market and we expect it to play out across the region for co-living as well.
Spencer Levy
And with that, I would like to thank our guests here today, starting with Dr. Sabine Schaffer, Managing Partner and Co-Founder Pro-invest Group. Sabine, great job.
Sabine Schaffer
Thank you so much, Spencer, and I highly enjoyed our conversation and look forward to hopefully doing more in the future.
Spencer Levy
Absolutely. And Stuart McCann, Managing Director, Advisory, Capital Markets in Asia Pacific, coming to us today from Australia, but based in Singapore. Great job, Stuart.
Stuart McCann
Thanks, Spencer. Great to be here. Enjoyed the conversation.
Spencer Levy
We hope you enjoyed this conversation as well. For additional information and archived content, including our previous episode on co-living from a few years back and lots more, please visit our website, CBRE.com/TheWeeklyTake. And on the subject of shared space, we hope you will share this episode and subscribe to the show. Please also leave us a review on the podcast platform of your choice or send us a note with your feedback. We'd love to hear from you. We'll be back next week to keep spanning the globe of commercial real estate and look forward to having you back soon. For now, I'm Spencer Levy. Be smart. Be safe. Be well.
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