How Co-Living Makes Great Business Sense

Sharing resources is at the heart of most of the innovative offerings today. Co-living is one such disruption led by nomadic millennials, who are redefining the meaning of 'living.'
How Co-Living Makes Great Business Sense
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From sharing rides and high-end equipment to sharing workplaces and even living spaces – this is truly an age of owning experiences over assets. Millennials’ lack of interest in owning a home and escalating real estate prices are giving rise to a new way of living: co-living.

India is a $50 billion housing market, which includes 15 million migrant students and 40 million migrant professionals. There is an untapped demand of 60 million beds currently and this creates a huge opportunity for entrepreneurs and start-ups operating in the space, highlights Rohit Kapoor, CEO, New Real Estate Businesses, OYO.

In fact, the nomads of today are becoming a major force driving the Indian co-living market—an estimated 42 per cent of the workforce in India constituted millennials in 2018 across the top seven cities in India. Millennials will continue to form a major proportion of the country’s working population, nearly 41 per cent of the workforce by 2023.

A large percentage of millennials are moving to urban centres in search of jobs. However, there is a severe shortage of quality affordable housing in Tier-1 and -2 cities. “The first thing they face is high and unruly demands from the landlords who belong to the unorganised sector offering little facilities. With the technology parks and business centres in proximity, the rentals shoot up even further,” shares Suresh Rangarajan, Founder and CEO, Colive.

This is despite the fact that India has an unsold inventory of 12.76 lakh units across major cities. “Top seven cities, including Delhi-NCR, Mumbai, Kolkata, Bengaluru, Pune, Chennai, and Hyderabad had residential inventory overhang of 33 months in Q4 2018. Co-living start-ups are tackling this unique problem by turning the unsold residential properties into fully-managed shared accommodations equipped with a wide range of lifestyle amenities,” informs Ismail Khan, Chief Business Officer, Nestaway Technologies.

“One of the big reasons for co-living being high in demand is the fact that co-living facilities have enabled millennials to live in newly-furnished spaces with range of amenities at an affordable cost. The co-living start-ups are going above and beyond just home-rental to make daily life more convenient,” adds Kapoor.

Convenience and Community

According to a survey by Knight Frank, more than 70 per cent millennials in India prefer co-living as an option due to the flexibility and services available in these accommodations. It is a simple ‘plug and play’ model that provides a ready-to-move-in option for consumers. Most millennials prefer organised shared accommodation (co-living) over traditional rental models as they do not have to deal with issues such as:

•Lack of standard practices for security deposits, notice periods and monthly rentals

•Social acceptance issues for renting houses to youngsters and single working professionals

•Hassles with housekeeping, payment of utility bills, maintenance, furniture and fixtures, renewal of lease contracts, etc.

“One of the major advantages of co-living spaces as opposed to PGs/hostels is that it significantly cuts down the cost of living as people end up sharing the rent and at the same time enjoy add-on services like daily housekeeping, laundry, on-call resident facility management, curated meals and so on,” says Kapoor.

Additionally, the biggest differentiator in co-living is the emphasis on community. Co-living operators are cultivating communities by placing emphasis on organising social activities, events and workshops. They also tend to match residents with other like-minded people though personality profiling. “Our living spaces are equipped with recreational features like cinema rooms, games and fitness rooms, community kitchens and dining areas, terrace lounges, and dance clubs, to name a few. Moreover, we build a community with weekly events including live music sessions, stand-up comedy, jamming events and zumba workshops. We make sure to offer a fun platform for our members to collaborate and network with each other,” details Rangarajan.

The intangible benefit of living within a community helps residents find their own tribe beyond the office/college. This has a huge positive impact on the overall well-being of an individual, adds Nikhil Sikri, CEO, Zolostays.

Another major factor that differentiates co-living players from traditional players is the efficient technology-driven process. “From finding the right place to live and having access to amenities, to ease of conducting daily activities and availing service support, everything is accessible at the click of a button on our app or the website. Residents can also pay their rents through the app,” shares Rangarajan.

Not only the guests, property owners and managers get seamless access and information. “Our Maestro app is the one-stop-destination where business can see and fix all the issues related to the operations. Service Managers can raise and track tickets by using this app,” says Kapoor.

What’s there for investors?

The recent demand survey from JLL and FICCI shows that most of the millennial workforce is currently spending between Rs 10,000– 15,000/bed/month for their shared rental accommodation. Interestingly, across income levels, most millennials are willing to pay up to Rs 3000/ bed/ month over and above their current rental cost to move into a co-living accommodation.

Youngsters consider co-living as ‘worthy’ option for living than ‘cheap’. “Youngsters are more than ready to spend on co-living for the benefits it provides. 76 per cent of our customers are working professionals, 17 per cent are students and the remaining 7 per cent self-employed / entrepreneurs. Hence, co-living has large potential of returns,” discloses Rangarajan.

In co-living, asset owners have the advantage of leasing out property to the operators for a long period at significantly higher yields. “Co-living offers higher rental yield of 8-11 per cent, as compared to traditional yield of 1-3 per cent in residential properties. It is certainly paving way for another asset class in rental sector investment,” highlights Khan of Nestaway.

In addition, due to longer tenure of lease, owners are assured of stable income. “We execute 5 years of service agreement between Zolo and property owners and offer 2 months of security deposit. With a 5 per cent rental escalation every year and no brokerage/commission, the owners feel more comfortable and relaxed as everything can be managed and monitored online,” underlines Sikri.

For a franchise unit, brands expect minimum area of 30,000-40,000 sq ft with an investment of Rs 15 lakh per unit with two beds which can go up to Rs 15 crore required for 100 rooms and 200 beds. Franchisees can expect operational break-even in just four months. “Franchisees can expect to make 13-14 per cent after all expenses in franchise unit. Average operational expenses come at Rs 1250 per bed and overall expenses may go up to Rs 2250 per bed,” reveals Rangarajan.

Business Models

Most of the brands in the co-living space started off over the last 4-5 years and operate on a combination of operator and fixed lease model or revenue share model. With occupancy rate of 85-90 per cent and average billing of Rs 10,000 per bed per month, brands are consistently witnessing 100 percent revenue growth over the last couple of years.

Many of these brands have carved a robust model and processes, and are now focusing on the franchise model to expand their base across the country. “We plan to foray into new cities through the franchise route where we would be sharing our brand, technology, operations and processes to the franchise partners. Our next course of action includes expanding to Mumbai, Pune and Delhi,” shares Rangarajan of Colive.

Another co-living brand, CoHo, has plans to enter into franchising. “We have been operating in fixed lease and revenue sharing models. With our platform having strong operating expertise and technology, we also intend to offer franchises in cities like Chennai, Mumbai, Pune and Hyderabad,” adds John Jacob, Associate VP, CoHo.

“We prefer owners who have properties near institutes, universities and large corporate parks. We are following the FOCO (franchise-owned company-operated) model, which will not only help us expand but also provide an opportunity for property owners to earn higher revenues through profit sharing,” says Rohit Pateria, Founder and CEO, Placio. The company is targeting cities like Chennai, Coimbatore Vellore, Bengaluru, Nashik, Pune, Mumbai, Chandigarh and Dehradun for franchise expansion.

On the other hand, brands like OYO Life and Nestaway (Hello World) operate on bulk leasing, where they take whole buildings/towers from property developers and convert it into co-living space. “Nestaway operates in the distributive-business model, where we manage properties that are not necessarily in the same building. With the launch of Hello World, we have entered the lease and operation model where we have revenue-sharing arrangement with property owners,” discloses Khan. Hello World is currently operational in 15 cities with around 10,000 beds.

Moving Ahead

Given the amount of unorganized market, there is huge untapped potential in the co-living space. India’s co-living market is expected to increase at a CAGR of 17 per cent over the next five years to touch Rs 1 trillion market by 2023, according to a joint report by JLL and FICCI. The rising demand for shared renting will propel the market with capacity of 5.7 million beds by 2023 from 3.6 million beds in 2018. Delhi NCR will constitute nearly 40 per cent of this potential market opportunity, followed by Mumbai at 25 per cent.

“With the advent of new players in the segment and growing acceptance, we are positive that co-living is going to be the next big wave in India that will alter the real estate landscape in Tier-1 as well as Tier-2 cities, especially IT hubs and centres which are hotspots for young people pursuing professional and academic goals,” concludes Kapoor.

(This article was first published in the December 2019 issue of Entrepreneur Magazine. To subscribe, click here)

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