Co‑Living: Purpose Built Developments

Co-living is the latest buzz word in real estate sector today. Yes, it is a very promising segment and evolvingvery fast in India, particularly in major cities which attract migrant professionals and student every year. Many big developers including Sattva, Lodha have already forayed into this segment via varied routes;many venture fund houses are also looking at this asset class aggressively. Till now, most of the co-living operators have been only concentrating on adding beds in their portfolio viaretrofitting model. In this model, they are taking an entire block of an apartment on lease and convertingit into a co-living space. Yes, simple strategy, improve top-line in short period, utilizing the sizeable inventory available, owing to the current residential real estate market.

However, few operators are looking actively for greenfield opportunities as well. It is a good change for this segment. The long-term solution is Purpose Built Development.

Yield expectations

On economic front, the yield rate for pure residential usage is 2%-3%; for retrofit co-living space it is between 5% to 6%; while for Purpose Built Development (for 200 beds), the yield rate is 8% - 9% and for large Purpose Built Development (800 beds +) it is upwards of 10%.

With the segment evolving further, retrofit development will witness immense price pressure owing to limited differentiation and therefore, profitability will drop significantly. Whereas, user preference is expected to shift towards Purpose Built Development owing to better amenities, optimization and otherfactors.

Simultaneously, operators are increasingly preferring to buy-out large Purpose Built Development; and sell it out to retail investors. This strategy primarily serves two purposes - venture capital firms backing these operators make upfront profit and the leased development become expensive overtime and thus put downward pressure on their operating profitability.In the coming years, the sector is expected to witness major changes in the market dynamics and existing practices.

While it will open new opportunities for developers, venture fund houses and retail investors,the facilities and enhanced service standards are going to be a boon for the end consumers.