Serviced Residences (& Co-Living) Becoming a Mainstream Investment Asset Class

02 A Look into the Serviced Residence Segment (including Co-living) 

SRs, also commonly referred to as “Aparthotels” or “Extended Stay”¹ can be considered as a hybrid between Residential Apartments and Hotels with the key differences between these segments highlighted in Figure 2.

SRs typically have lease terms which offer higher flexibility, with units sold daily, monthly or yearly, as compared to Residential Apartments, which are typically leased on a one-to-two-year basis, and Hotels where rooms are sold daily and are largely dependent on seasonal demand. As such, SRs have the flexibility to sell more long stays in a down-cycle to provide income resilience whilst also promoting more short stays in a high-demand environment to participate in further income upside.

Serviced Residences vs. Hotels

Both SRs and Hotels are competitive in their price points, although the value propositions for each are different. SR properties may also offer highly curated in-stay guest engagement programs which are typically not found in Hotels.

SR units are more spacious and are typically 10-40%² larger in size than Hotel rooms. With less space allocated to typically lower-utilized facilities, such as convention halls and ballrooms, an SR can provide for larger unit sizes and flexible unit layouts (e.g. studio to 3-bedroom) which allows for the inclusion of ensuite or in-room amenities such as a fully equipped kitchenette and washing machine. The larger units in SRs are more conducive for longer stays with guests that stay on an extended basis making up a considerable proportion of an SR’s guest base.

In some cases, there are individuals and families that opt to stay for several years, which may also point to SRs (& Co-living) being seen as an alternative form of permanent residence.  

From a development perspective, Hotels run higher investment costs compared to SRs and Residential Apartments due to the higher costs for interior renovation and mechanical & electrical services (M&E). Similarly, from an operational standpoint, the level of maintenance and running costs required for Hotels are generally higher than those for SRs and Residential Apartments.

Serviced Residences vs. Residential Apartments (Multifamily sector)

Although Residential Apartments (Multifamily sector) hold many of the same key features as SRs, several differences between the two products exist. Multifamily leases are typically fixed on an annual basis, compared to SR leases which offer greater flexibility of terms with daily, monthly, and annual rates. The longer WALE (weighted average lease to expiry) of Multifamily leases may therefore limit any adjustments to rental rates, running the risk of having no upside or a tailed-off upside in an inflationary environment.

Notably, the level of operational expertise required for Multifamily is lower compared to SRs, where the capability of the operator is highly influential on the overall asset performance. This renders less branding opportunity for Multifamily and is a further factor compressing any potential rental upside.

In addition, due to its Residential classification, the Multifamily sector may be subject to residential-related policy risk (e.g. rent control) in many countries.  

Co-living Hits the Sweet Spot for Millennials
and Gen-Z 

Co-living, while sharing similar owner-operator business models with SRs, offers slightly different features. The product offering is smaller in size compared to SRs, with typically less in-room amenities, and more shared facilities such as a social kitchen and co-working spaces in common areas.

The Co-living concept is designed with the Millennial or Gen-Z in mind. Although the market is a relatively nascent one, demand is growing. The Covid-19 pandemic has spurred a new way to live and work, with a shift toward more experiential preferences. Co-living properties provide a sweet spot for this target segment to experience a community living lifestyle at a more competitive price point as compared to SRs and Hotels.

03 Promising Macro Fundamentals to Underpin Long Term Growth Potential of Serviced Residences in APAC 

Countries across the globe are further relaxing Covid-related restrictions and re-opening borders, with the US and Europe currently in the lead. APAC markets are expected to progressively follow on, with the trend underpinned by select structural demand drivers across the region.

Sustained Robust Foreign Direct Investment (FDI) Growth

FDI into major countries and key metropolitan cities is projected to continue its current growth trajectory, at a compounded annual growth rate (CAGR) of 3.7%, from 2022 to 2030 (see Figure 3), and should continue to underpin corporate long-stay and business travel demand going forward.

Enlarged Demand Base Supported by Favorable Demographics, Led by APAC

Total population in APAC is expected to grow at a CAGR of 0.6%³ (+216mn) from 2022 to 2030 (Advanced Economies⁴: 0.3%³ CAGR, +25mn). Notably, the working-age population⁵ is expected to comprise more than half of this increase (+119mn)
in APAC. 

Middle class population⁶ spending is projected to grow at a CAGR of 2.0%, equivalent to a US$2tn annual increase, through to 2030. This group of consumers can afford more non-essential goods and service luxuries, including travel, hospitality, recreation, and personal care, compared to the less affluent.

Return of International Travel and Continued Trend of Domestic Travel

International travel is set to see a sharp rebound on the back of the re-opening of international travel lanes and increased vaccination rates, with certain regions projected to reach 2019’s level as early as 2023 (see Figure 4).  

Recovery will be uneven across the regions, with APAC only projected to surpass 2019’s level by 2025. However, upside from domestic travel is expected to be the reigning travel trend⁷ in APAC, amongst all regions, and should cushion any shortfall in international arrivals.

04 Serviced Residences (& Co-living) are Strategically Positioned to Benefit from Sector Tailwinds

The anticipated post-pandemic cyclical recovery for the global and APAC travel industry presents a clear runway for the hospitality sector and particularly SRs, supported by the long-term structural demand growth drivers and near-term tactical tailwinds underpinned by a stronger preference for trusted brands and longer travel duration.  

Serviced Residences Outshined in the Covid-19 Era, Showcasing Resilience and Defensiveness

The resilience of SRs can be evidenced by their higher occupancy¹⁰, most notably at the height of the Covid-19 pandemic in 2020, where occupancy levels in both APAC (47%) and globally (47%) surpassed their Hotel counterparts (see Figure 5).

Co-living among Investors’ Choice of Hotel Asset Conversions

The conversion of Hotel assets has been an emerging trend, with 27%¹²  of Hotel investors in APAC through the first half of 2022 (2015-2021 average: 7%) intending to either convert or demolish these assets to other uses. For instance, investors seek to convert these assets into offices or apartments, with Co-living apartments being a popular choice in Hong Kong and Singapore¹³. This represents a shift in demand drivers, as demographic changes bring along a different set of guest preferences.

05 Other Key Considerations Investors should be aware of

Investors should be cognizant of potential downside risks despite the generally positive outlook for the travel sector.

Potential Persistent Headwinds for the SR and Co-living Sector, including: (i) the re-emergence of new variants of Covid-19 or other contagious diseases; (ii) incremental competition from entry of new SR operators and private homestay platforms, as well as new brands from major Hotel groups; and (iii) operator profit margin compression due to elevated expenses from rising cost of goods, energy prices and payroll.

Choice of Operator is Essential: The above mentioned risks can be mitigated by having a key operator in place. In a post-Covid world with evolving traveler and guest preferences, the need for a trusted operator and brand is paramount,

now more than ever, with a heightened emphasis on factors such as duty of care in sanitation standards, sustainability, wellbeing, digitalization and personalized services, safety, and security.

Owner-operator Model Calls for Outsized Reliance on Trusted Brands: Operator companies are the backbone of SRs and Co-living properties, and the success of these investments largely rides on the reputation and execution capability of the operator. Brand recognition is key to a growing customer base, and operators with strong expertise – particularly in local markets – and more established customer networks will be the top contenders in this space. The choice of operator is thus increasingly critical in delivering customer satisfaction and optimal asset performance.

Opportunities Abound - Promising Tailwinds in APAC

The recovery of the travel sector has a global spillover effect, and this points to tailwinds across all regions, contingent on border re-openings and the state of the post-Covid recovery.

Over the next few years, the anticipated cyclical upswing is expected to propel an uptick in investment total returns, underpinned by the gradual recovery in occupancy and average daily rates (ADRs) to pre-Covid levels. The current early-stage cyclical rebound presents a compelling opportunity for institutional investors to strategically rebalance their portfolio to benefit from the potential upside.

Regionally, APAC provides further promise for the following reasons:

(i) the region is expected to continue to attract incremental inward FDI, exhibited by the robust projected growth rates in key markets (e.g. Australia, Singapore, Vietnam) through 2022-2030 which should help drive corporate long-stay demand; and

(ii) enlarged potential demand base with working-age population growth in APAC outpacing that of all advanced economies⁴, and a further boost from middle class population growth.