Article

Hotels are finding room for co-living spaces

Co-living projects are on the rise in converted hospitality properties amid a hunt for rental growth

août 04, 2022

Hotels are increasingly being turned into co-living spaces in markets where institutional investors are hunting for cheaper alternatives to residential conversions and high rental growth potential.

In June, a US$200 million joint venture between asset manager PGIM Real Estate and co-living operator Weave acquired Rosedale Hotel in Kowloon, Hong Kong, with the intention of converting the 435-key property into a co-living property.

Meanwhile, in Singapore, real estate management firm LHN Group has invested S$90.5 million (US$65.5 million) in the past three years to acquire properties under its co-living brand Coliwoo — with its latest two Amber Road properties also converted into new co-living offerings.

Behind the deals are favourable tax rates in the two cities. Lower taxes on the purchase of hospitality assets compared to residential assets — which are subject to higher transaction taxes that decrease investment returns — have made hotels the preferred option for asset conversion, particularly in Singapore and Hong Kong.

Both markets have seen a slew of conversions of hotels into co-living properties, where private rooms are offered with shared common areas.

Unlike most of Asia Pacific, where these modern communal living properties are widely considered multifamily assets, Singapore and Hong Kong stand out as exceptions. This has lent momentum to the co-living trend that first found its footing in Europe and the U.S.

The rising popularity of co-living is down to the convergence of two factors, according to Noel Neo, Head of Singapore Mid-Markets, JLL Hotels & Hospitality Group.

“One reason is the stark rise in residential rents across the region over the past few years,” says Neo. “In the case of Hong Kong, another factor is the income loss of underperforming hotels which were first hard-hit by social unrest and subsequently the pandemic.”

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The rise of co-living

Work-from-home policies, which became a norm during the pandemic, also contributed to the emergence of new co-living properties.

“The demand for larger, individual living space surged because it was no longer feasible for multiple people to have conference calls within the same space,” says Neo.

For Singapore and Hong Kong, these ideal conditions for co-living convinced investors to actively seek opportunities in the sector popular among young professionals, expatriates, and students.

Many co-living operators adopted an aggressive growth strategy to purchase and convert hospitality assets into co-living properties to meet this demand, especially during the pandemic.

“Some operators have been able to secure acquisition opportunities in Hong Kong, partly due to suppressed valuation in the hotel segment,” says Nelson Wong, Executive Director of Research, JLL Hong Kong.

Buyers in Hong Kong were able to purchase hotels at a 20% to 40% discount to the pre-covid price, according to data from the latest JLL Capital Tracker.

“Hotel owners, reeling from the impact of the pandemic, were also more open to selling properties that they closely held previously,” Neo says.

In Singapore, the co-living trend has also shown no signs of abating. “Hotel prices have remained largely unchanged since the pandemic. Even with the tourism recovery, a drop off in demand for co-living conversions on a purchase-to-convert basis appears unlikely,” says Neo.

Bright spot

The strong interest in co-living assets comes amid a muted second quarter of investment activity as the market adjusted to tightened financial conditions, JLL data shows.

“Capital remains committed to the Asia Pacific real estate market, but deployments will be more selective,” says Pamela Ambler, Head of Investor Intelligence & Strategy, Capital Markets, Asia Pacific, JLL. “Investors are playing the long game and pricing in financial market tightening to any investments for the foreseeable future.”

Despite the outlook, Neo believes it will do little to dampen the growth prospects of co-living in the long term.

“There is clear demand for co-living offerings with professional management and quality assurance that give tenants comfort, while plugging the gaps and inefficiencies of traditional housing models,” says Neo.

“We expect this demand to spark a broader push from institutional investors to transform hospitality properties into co-living spaces.”

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Contact Noel Neo

Head of Singapore Mid-Markets, JLL Hotels & Hospitality Group

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