How much better is coliving for landlords? It depends on the place. We looked at rental yields for coliving properties in ten major cities (and coliving epicenters) globally. Let’s follow the sun for a tour of rental yields in coliving across the globe.
Sydney +50%
In Sydney, coliving rental yields are at approximately 4% per year, based on the recent listing of a coliving building by developer Revelop (which is on the market for $10M on a building earning $401K a year, with a 3% year-over-year increase). Assuming that the developer will get what they are asking, this is a significant increase compared to the usual 2.6% of residential gross rental yields of Sydney. Once factored in occupancy and leasing costs, in Sydney a coliving landlord should expect 50% or more over a typical residential real estate investor.
Hong Kong +50%
The expected rental yield of an apartment in Hong Kong is 2.2%, and converting that apartment to colving will yield 3.4% per year, according to Invesco’s report “A case for colving.” Most of the increase in yield comes from the better utilization of the spaces (in fact, similarly to coliving space, micro-flats have recently enjoyed higher rents, of even 3.5%).
With coliving yields in line with the conventional residential real estate rates, the attraction for a landlord towards coliving is more about the end-to-end management of property and the ability for developers to scale investments (in a market where usually there is no institutional money in residential real estate), which explains why so many of the coliving offer in Hong Kong happened in buildings (as opposed to individual apartments).
Singapore +0-20%
The average gross rental yields are at 2.6% in the city-state, and similarly to Hong Kong, the yields for coliving and conventional rents are in line. However, unlike in Hong Kong, in Singapore so much of coliving happens in regular residential units (as opposed to buildings). While renting directly to coliving companies, as opposed to using realtors, should result in a 20% increase in net yields (half from better occupancy and half from lower transaction costs), because residential real estate is so fragmented in the city-state, very few landlords have been able to take advantage of it.
Coliving yields are going up with the recent shift away from leases, in favor of property management agreements. While a few operators have been playing with the property management model for some time, where they can pay higher rents to the landlords in exchange for no commitment to guaranteeing a monthly payment, last February’s announcement of its shift to “asset-light model” from Hmlet, the regional market leader, is likely to accelerate this transition. Given the razor thin margins and the high cost of properties in Singapore, the transition is a welcome change for the all coliving operators, which will likely make coliving sustainable in the longer term. In spite of the relatively small increase in rental yields, demand is strong, which is why the city-state has over 30 coliving operators active right now.
Mumbai +333-433%
Coliving landlords can expect rental yields of 10-13%, according to real estate consulting firm Knight Frank, vs traditionally residential real estate yields 3% across India (Mumbai surprisingly does not get higher yields, on average).
Even more than Singapore, India has also seen an acceleration towards revenue share with COVID19. “There’s certainly a change in mindset post Covid-19. Pure revenue share structures are on the rise as none of us are acting as a buyer or seller in the deal anymore, we are partners now,” said Jitendra Jagadev, CEO of The Hello World.” Interestingly, coliving operators in India are able to capture a large share of the coliving revenues. The typical agreements are 50:50 split between landlords and operations, but if the operators do any capital investments in the properties, the split can even go as high as 70:30 in favor of the operator.
Berlin +100%
When it comes to housing, Berlin is an outlier, in so many ways. Accordion to CMS’ Urban Being report, it has one of the lowest homeownership rate (at 16%) among global cities, an overwhelming positive view on rent control measurements (78% of population in favor), and an outsized share of “landlords who are slow/unresponsive to make repairs”). With this premise it is not surprising that another leader in coliving hails from here.
Short-term rental yields (defined as 1-12 months) are at 10%, vs 4.95% of average residential rental yields of Berlin (and 3% of Germany). Given this big difference, and the strong demand from 50K people moving to Berlin annually, it’s not surprising that more landlords would want to benefit from short-term rentals. Coliving simply offers a scalable way for them to do so. And the Medici Living Group took this seriously with their EUR 1B coliving fund–albeit it’s supposed to be for expanding across Europe, not just for Germany (good timing, given the recent rent freeze has created a lot of uncertainty in the Berliner market).
Milan +26%
DoveVivo’s (the country market leader, and probably the largest coliving operator in Europe, with 6,000 bedrooms) study shows that coliving in Italy is 26% more profitable than conventional rent for a landlord. As often, higher occupancy rates and lower transaction costs are the main reasons for the gain, however, credit losses from regular leases are the next factor, similarly to other countries where tenants enjoy higher protections than landlords. DoveVivo even has a service where they would even help a prospective landlord to find a good investment property and sign a long term lease right away. A great way to create more coliving landlords.
London +30%
“Investors say the micro-units create more attractive income streams as the more efficient use of space means the rent per square foot in each flat is 10-15 percent more than for traditional rentals.” That means that coliving landlords are likely to get 3.3-4.6% (vs a typical residential yield of 2.9% for residential real estate in London). To confirm this, The Collective’s Old Oak building was priced to return a 4-5% yield (at the GBP 100M asking) — and ended up closing at GBP 125M actually.
While the rental yields are not that much higher than regular residential real estate, The Collective together with DTZ Investors, to scale up its investments and get investors to participate to 8-10% returns (combining development margins, capital appreciation, and leverage–in addition to the GBP 625M the fund is also raising GBP 375 of debt), with the recent launch of COLIV, the first coliving fund.
New York +40%
In the New York city area a few developers have embraced coliving, with a model built around dedicated buildings, where the income has been 40-50% higher than regular apartments, on a unit basis. The sized-for-efficiency (or in the words of one of Ollie’s co-founders: “For us a 535-square-foot studio is a two-bedroom micro-suit… a 750-square-foot one or two-bedroom is a three-bedroom suite”) is to be the major driver of this gain, together with the strong demand.
By global standards, New York residential rental yields of 4.5% are already high, being able to add 40% on this clearly explains why coliving is booming in the city, with at least 20 operators active, including all the largest US operators, such as Ollie and Common, but also some of the global ones, such as Quarters, Node, The Collective, and Venn.
Toronto +40%
Local operator Roost has a deal for landlords, which promises to “earn up to 40% more than traditional rents” — all that for a 4% management fee. Seems like a win-win for landlords and the operator, but also a high increase in returns for something that does not require any conversion of real estate assets (perhaps not sustainable as more operators move in?)
San Francisco +0-10%
With two of the best known American coliving companies hailing from here (StarCity and Bungalow), it’s hard to think that the rental yields for coliving landlords in the San Francisco area are …the same as those of conventional residential real estate. Like in other cities where the model is based on regular apartments (e.g., Singapore), the value mainly comes from renting larger units (3-4-5 bedrooms) and subletting, the gains are limited. That’s because San Francisco has a relative abundance of larger units and scarcity of smaller units, as family size shrunk over time.
The city has also a notoriously difficult set of rules for developing new buildings, making it hard to create purpose-built coliving buildings. Some operators have been converting old hotels instead. Until more of these buildings are available, it’s unlikely to see an increase in rental yields for coliving landlords (vs. regular residential real estate, at 3.4%).
Summary
While there are significant differences in increases of rental yields from coliving vs residential real estate, driven by local market characteristics and regulations, there are also some clear common trends across global cities:
- In places where coliving is done in purpose-build locations, the increase in returns is higher, between 50-100% more than conventional residential real estate–in Sydney, Hong Kong, Berlin, and London. The main driver is the increase in space utilization, but there could be other factors, such as regulations and local policies.
- Everywhere, at the very least, coliving adds some value by reducing occupancy and transaction costs for landlords. This translates into higher yields from landlords between 10-25% in Singapore, Milan, Toronto, and San Francisco are only mainly benefiting from this.
- As coliving operators mature (and developers get more comfortable with coliving), the two models will likely coexist more and more, resulting in yields between Hong Kong and New York; San Francisco is already moving in this direction, Singapore, much slowly, too.
- Mumbai is a real outlier in this list, and likely other emerging markets. The returns are not a function of the real estate assets, but instead a result of the coliving operations (which could explain why operators are able to split the rental 70:30 in their favor).
Note: All rental yields from Savillis World Cities Residential Rental Index (Feb 2020)
