Serviced Residences: Next Big Move in Rental Housing

We are living in a 'shared economy phase' now. Auto Sales are dropping on account of rising preference for Uber and Ola for commuting; home sales are dropping due to high prices and increasing preference of young generation for renting rather than buying. Millennials don’t believe in accumulating properties and consumables. They believe in experiencing a hassle free lifestyle with good amenities.

This change of mindset has resulted in bringing a big shift in the economy. We, as businesses need to accept this reality and redesign our models to address the present requirements and stay relevant in the future.

In real estate, unimpressive yield rates, relatively low appreciation of property values and stringent regulations have been the major factors to drive the demand for Built-to- Rent (Rental Housing) models. This has got a further impetus with the introduction of REITs and Rental Policy.

Table: Rental Housing Model for Age Groups

Over the last few years, housing models have evolved significantly to cater to students and young working professionals in the form of Student Housing and Co-living. Both the segments have been witnessing a phenomenal growth in recent years. Although Senior Housing is in a nascent stage now, but the concept has started gaining momentum already.

However, what is missing here is the rental housing model that can cater to the requirements of the age group between 28 to 60 years. Although players like Nestaway is working on aggregation model but it does not offer any significant change compared to traditional model.

Today, urban social structure, primarily consist of working couples, nuclear families and single parents.This configuration will continue to be dominant in coming times as well. This changing social fabric is set to create a significant demand for Serviced Residences in rental model across the major economic clusters in Tier I cities.

Table: Current Rental Housing Cost Model

The above table reflects the current economics of a traditional rental model. The total reflects the cost of living in a typical 2 BHK house near economic hub of Tier 1 city in a Grade A facility.

Now, what are the current major challenges faced by the nuclear families in Tier 1 cities?

• Managing Working staff;
• Managing Child schedule;
• Food management;
• Managing guests and others

The proposed Serviced Residence model can be developed to address the pain points and create convenience for the targeted age group. Typically, it will be a fully fitted out facility with all available white goods – TV, Fridge, Washing Machine, dishwasher, etc. Also, facilities need to be highly tech driven for convenience of the tech savvy generation.

The future of Serviced Residences lies in being able to manage all these pain factors and in offering additional facilities like club house, gym and other common amenities which are commonly available in Grade A facilities. The operators in this segment can manage different facilities across geographies ensuring flexibility to residents to move as per their job locations and live hassle free.

Table: Current Rental Housing Cost Model

Table 3 shows the configuration and pricing model for Serviced Residences. Considering its high demand in dense economic hubs across India, it is an emerging opportunity for real estate developers. Currently, ratio of end user and rental is 60:40 and in next one decade it is expected to reverse to 40:60.

InfactRetail investors are not happy with current rental yields of 2-3% and managing it post investments. In the near future ,the Serviced Residences like Co-living and other rental housing models will provide more than 8% rental yields to investors and will also create opportunity for operators.

Real Estate can only survive with cost of money pegged in REIT otherwise the current credit market and buying capacity of end user misery will only deepen with times.

Pain in a business segment is the sign of required change and we believe rental housing is the answer to it.