Co-living, a winning hybrid model

17th January 2020

Serviced apartments are ticking all the boxes for a growing number of city dwellers, but they are also charming investors as a resilient alternative asset class.

By Caroline Demol, Portfolio Manager at Edmond de Rothschild Smart Estate

Have shared experiences while keeping your personal space. Enjoy community from the comfort of your own home. These ambitions are gaining ground with the young and not-so-young city dwellers looking to combine privacy and community. Similarly to professionals in co-working spaces, co-living residents live separately, but value being in the city centre, having easy access to public transport, being able to use things without needing to own them, and being with people from the moment they set foot in the door. The trade-off is a smaller apartment, but one that is perfectly fitted out, with intelligent space management and an all-in cost (including rent, internet access, electricity, water, gym membership, additional services, etc.).

A different state of mind

Waiting rooms, reading corners, lounge areas, work labs, game rooms, fitness rooms, communal kitchens, laundries and green spaces are all designed following a next-generation model that encourages interaction and fosters a sense of community. Occupants’ age ceases to be a divisive factor in this type of intergenerational co-living. A 25 year-old app developer may well have more in common with a 50 year-old Google manager than another young professional. Coming in with a desire to share, exchange, and live an authentic experience, whatever the destination or city, are the key criteria when deciding to rent.

Residents of this modern apartment complex have many different activities to choose from: sports and knowledge-sharing (cooking lessons, sewing workshops, etc.) during the weekend, themed dinners and movie nights in the evenings... In addition to booking services online (home delivery, concierge services, transportation, etc.), each resident can offer, organise and share top recommendations for local restaurants, concerts, and so forth. Digital interfaces help residents interact and establish a specific emotional relationship with their home environment to create a real sense of social belonging.

Barriers to entry

As a cross between AirBnB and a hotel, the mixed model of serviced apartments is gaining ground in metropolitan areas. This offering is a response to profound societal, demographic and environmental changes. Specialist operators such as Sharies, Bikube, The Babel Community, Quarters, Quartus, A-Stay, Cohabs, Propintra and Colonies are banking on this promising market. These start-ups are counting on their technological know-how to create barriers to entry and protect themselves from competition, using high-performance online reservation systems, concierge services and top-quality digital applications.

A profitable economic model in high demand

In a low or negative interest rate environment, this alternative sector is also attracting keen interest from investment professionals: private investors, real estate investors, private equity funds and, more recently, public sector funds, which appreciate this in-demand and resilient economic model. Buildings are generally strategically well-placed in city centres, protecting their value in the event of any downturn in the market.

Real estate investment professionals are getting involved in this new asset class to access higher returns than those available from traditional apartment blocks. Some even go so far as to take over operational management to generate greater revenue. While yields are likely to gradually decline to a range of between 4% and 5% (an interim level between conventional apartment block rents and hotels) as the concept gains in popularity, investors can then count on capital gains on their investment.

The right asset

All that remains is for investors to identify the right asset. Particular attention should be paid to the property’s sector classification, which will vary from country to country, in addition to its intrinsic qualities. In the residential sector, repositioning as conventional rented apartments remains an option if the business plan fails. In the commercial sector, reclassification as a hotel or a different kind of managed apartment block (e.g. for students or senior citizens) is possible. In all cases, beyond the potential to redeploy the asset, the most crucial issue is location, now a more strategic concern than ever, along with the possibility of conversion.

The figures, comments, forward looking statements and elements provided in this document reflect the opinion of Edmond de Rothschild on market trends based on economic data and information available as of today. They may no longer be relevant when investors read this document. Edmond de Rothschild shall incur no liability for any investment decisions based on this document.