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MHK

Keynote Interview: Now is the time to invest in flexible living assets

Serviced apartments and co-living offer investors a compelling blend of flexibility and stability because of their hybrid nature, says CapitaLand Investment’s Mak Hoe Kit. 

Read excerpts of the interview below or download the full story for more insights.
 

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No longer a niche sector, serviced apartments and co-living have become a strategic necessity for institutional investors, real estate developers and global city planners.

Mak Hoe Kit, Managing Director for lodging private equity funds at Singapore-based CapitaLand Investment, explains that serviced apartments and co-living can provide rental premiums and stable cashflows due to their duality in the residential and hotel markets.

Q: What long-term trends in travel and work are driving growth in the serviced apartment and co-living sector?  

Mak Hoe Kit (MHK): Since the pandemic, some behavioral patterns have emerged, which this asset class is capitalizing on. We see growth coming from multiple sources.

First, as airfares rise, many companies are asking employees to travel less frequently but stay longer in order to manage costs while still enabling face-to-face interaction. Second, people are increasingly combining business and leisure – what the industry now refers to as bleisure. They are extending their business trips for a few days and combining it with personal holidays. And third, there is a growing desire to work not just from home, but from anywhere in the world. As a result, the digital nomad trend is gaining popularity.

These factors are driving demand for serviced apartments and co-living properties, especially in prime locations and cities that have sound, long-term fundamentals and are business and investment friendly. According to market projections, the serviced apartment and co-living sector could triple in size by 2030.

Q: From an asset manager's point of view, what is the investment case for approach serviced apartments and co-living as hybrid investment?  

MHK: During covid-19, many hotels had to shut down due to the impact on travel, but serviced apartments largely remained open. The properties operated by our lodging business unit, The Ascott Limited (Ascott), achieved a strong occupancy of 60-70 percent, even during the height of the pandemic. That is because our serviced apartments are able to operate like a hotel, and pivot to function like a longer-stay multifamily apartment with shared amenities when required.

While multifamily assets can lock in rates for lease tenures of one to two years and provide stable occupancy, serviced apartments offer the ability to change rental rates more dynamically and the advantage of a rental premium, especially in an inflationary environment. Many countries are also stipulating laws on rent control and tenant eviction, which makes it harder to replace tenants even if a prospective tenant is willing to pay higher rents.

The investments we have made in serviced apartments and co-living across Asia and Europe have achieved alpha with exits well above our target rate of return.

Q: Do institutional investors understand the hybrid nature of these investments, and how does it impact their interest in the strategy?  

MHK: Investors today are navigating a volatile and fast-changing macroenvironment. While returns are top of mind, there is an increasing emphasis on resilience and adaptability. That is where serviced apartments and co-living stand out.

Serviced apartments provide resiliency because operators can rent them out for short or long stays depending on market demand. If the asset is located in a prime and central location, there could be many guests who want to stay for a shorter period of time, ranging from a few nights to weeks, and are willing to pay a much higher rental rate. This premium can be two to four times higher than a pure-play multifamily apartment that is rented out for one year.

Well-located serviced apartments with short-stay demand can generate significant alpha and rental premium for investors. In comparison, a hotel does not come with apartment-like amenities. In addition, serviced apartments generally have lower operational costs compared to hotels due to leaner staffing. In fact, we are also seeing many hotel operators moving into the serviced apartment space, demonstrating strong demand for this sector.

According to market projections, the serviced apartment and co-living sector could triple in size by 2030

Q: What real estate investment strategies are most suited (and currently most in demand) for serviced apartment and co-living sectors?  

MHK: All real estate investment strategies apply, including build-to-core and value-add. Many core funds, insurers and pensions are buying into this space.

We see a lot of value-add opportunities in this sector whereby the assets are either underperforming or underutilized, and we were able to leverage our capabilities to reposition them into higher-yielding properties. For example, we have bought serviced apartment and co-living assets, reconfigured their layouts, enhanced amenities and improved their operational performance. We have also turned offices, hotels and long-term residential units into these types of living spaces.

In all these cases, we need to drill down into the details, looking at the specific location or micro location, catchment area, price point and supply-demand profile. We then determine the product most suitable for the location and customer segment.

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