A Case For Co-living - Invesco

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A case for co-livingThis document is for Professional Clients only in Dubai, Continental Europe (asdefined in the important information), Ireland and the UK, for Qualified Investorsin Switzerland, for Institutional Investors only in the United States, Australiaand Singapore, and for Professional Investors only in Hong Kong and in Japan asdefined under the Financial Instruments and Exchange Law of Japan. In Canada,the document is intended only for accredited investors as defined under NationalInstrument 45–106. It is not intended for and should not be distributed to, or reliedupon by, the public or retail investors. Please do not redistribute this document.Sabrina UngerAnalyst, Invesco Real EstateJade TanAnalyst, Invesco Real EstateSeemingly no real estate sector is immune to the influences of theMillennial and Generation Z cohorts. Retail has been upended by thedisruption caused by e-commerce, driven by these generations’ aptitudeand proclivity towards technology. Logistics networks have movedcloser to them, making delivery faster. Traditional office demand hasbeen disrupted by the acceleration of co-working, as more companiesembrace greater locational flexibility to appeal to younger workers.Yet housing in its traditional forms has remained largely unaffected.While amenities have evolved, the principal fundamentals have not.Inflexible lease terms and early termination fees have remained, whilerents, particularly for institutional-quality product, have increased tounaffordable levels for many young renters.Co-living is an answer to younger generations’ desire for flexibility in citiesand more affordable premium living; it is a response to an increasinglyglobal workforce – one that exhibits a high degree of mobility, but alsoone that feels increasingly isolated and craves community. The stillnascent asset class is relatively fragmented globally, but the case forits growth is strong in many of the world’s most expensive locales.For real estate investors, it can be difficult to determine when an assetclass has sufficient demand to transition from passing fad to longerterm trend. At the same time, a fragmented, early-stage model maypresent an opportunity to gain a first-mover advantage and scalefor global operators, not to mention the added benefit of cap ratecompression as institutional demand increases.In this paper, we seek to connect the dots between co-living and moreestablished property types and make the case for greater institutionalacceptance, as well as define the demand profile of this new asset class,leveraging examples primarily from Asia Pacific, where the asset classis more mature, as well as the UK.

What is co-living, exactly?Demand – following the cause-and-effect flowDespite the buzz-worthy nature of itsnomenclature, co-living is not a newtrend, but merely the re-envisioning ofan old one. A living environment wherebytenants share resources and space inexchange for lower costs and culturalcommonalities harkens back to sociallyminded communes of the 1960’s, andfurther still to the boarding houses ofthe 19th Century. Put more succinctly,co-living in the modern era has beendefined as purpose-built and manageddevelopments that include a combinationof personal and shared amenity space.1UrbanizationThe pace of urbanization in this economiccycle is by now a well-documentedglobal phenomenon. The world’s urbanpopulation at mid-year 2015 wasestimated at nearly 4 billion (49% of theglobal population), up 766 million from adecade prior.2 By 2030, 60% of the world’spopulation is projected to be living in cities– an increase of 1.2 billion people in thespan of just fifteen years! (Figure 2).While this definition may give us a pointfrom which to evaluate the sector, it doesnot, in our view, adequately capture theoperational aspects that make it uniquefrom other accommodation types.Although not wholly homogenous acrossregions, most co-living facilities todayappear to be a transmutation of severalmore-established asset types, combiningattributes from each (Figure 1). Beyondthe element of shared physical space,what we have found through surveyingexisting co-living facilities today ascommon traits include:– Lease term flexibility, but with minimumcommitments (typically 1 month)– Asset-sponsored programming,with an emphasis on creating senseof community– All-inclusive billing and fully-furnishedsuite of spaces– At least one shared habitation space(bedroom, bathroom, living roomor kitchen)– Charged on a per-bed/per-room,not per-unit basis.While much of this urban growth isprojected to occur in emerging markets(predominately Africa and India), severalASEAN countries such as Vietnam andFigure 2Net gain in population living in citiesglobally (2000 – 2030f)(m)2000 –20052005 –20102010 –2015Indonesia, as well as China, Australia, theUS and several European countries areprojected to see urban growth rates inexcess of 1% per annum through 2030(Figure 3).This resurgence of the city has putunprecedented pressure on housing.Greater competition for a finite supplyof urban housing has led to higherprices, which has made traditionaloptions unaffordable for many cohorts,particularly younger occupants. Thisaffects both for-sale and rental stock,creating what has been widely acceptedas an affordability crisis.Net gain in urban population (LHS)Urban population (% of total, RHS)2015 –2020f2020 –2025f(%)2025 –2030f 1.2 billion more people livingin cities from 2015 to 20304006560.4%38036034060555049.2%32045Source: Invesco Real Estate using data from the United Nations Department ofEconomic and Social Affairs, Population Division as of September 2018. f forecast.Figure 1What is co-living?Co-living combines attributes of many established property typesTraditional ServicedmultifamilyHostels apartmentsFlexibility on lease term but withminimum commitmentAsset-sponsored communityprogramming emphasisOpen to any age/demographicHassle-free living solution includingfurnishing and all-inclusive billingShared living spaceSource: Invesco Real Estate.02 A case for co-livingSeniorshousingStudenthousingCo-living

JapanGreeceItalyGermanySpainUnited KingdomAsia PacificEuropeNorth AmericaPortugalSouth KoreaHong KongFranceSingaporeSwitzerlandUnited tnamFigure 3Annual average growth rate of urban population,by country (2018-30f)(%)3.02.01.00.0Source: Invesco Real Estate using data from Oxford Economics as of December 2018.f forecast.Changing nature of workFurther exacerbating pressures onurban housing is the changing nature ofwork. The age of loyalty work (wherebyorganizations met employees’ basic needsthrough pay, benefits and job securityin exchange for lifetime commitment3)has given way to a new model based onengagement. In order to attract and retaintop talent, organizations have had torethink how, when and where employeeswork in order to provide the flexibility theydesire. According to a recent survey, mostcompanies have already adopted someform of flexible work (Figure 4).The ability to move jobs to people andpeople to jobs also serves to address theworldwide widening skills gap by tappinginto broader talent pools. Given theworld population’s preference for cities,it stands to reason that employees maywish to move between cities but keep theirposition with their current employer. Anemployer that can accommodate such arequest is much more likely to retain andinstil loyalty among their employees.More likely than not, many of the sameemployees who desire varied worklocations will be younger age cohorts, asthey are untethered by mortgages andfamilies. By 2020, Millennials (generallydefined as those born between 1982 and1996) are expected to make up over a thirdof the global workforce.4 As Baby Boomersretire in greater numbers, Millennials willtake their place, further exerting theirinfluence on the workplace. Millennials haveexhibited a strong preference for workingabroad, with 71% keen to do so at somepoint in their careers (Figure 5). Manymulti-national companies are beginningto create opportunities for employees toengage in international assignments forshorter periods to fulfill this need - co-livingallows for these employees to obtaininstitutional housing in the cities they eitherwant or need to be in, without prohibitivelong-term commitments.Figure 4Percent of flexible work arrangement by company sizeHome-basedOnsite unassignedSatelliteCompany size (# of employees) 1k1k – 5k5k – 10k10k – 50k50k – 100kCo-workingOther 100k(%)10080604020% that offers this choice to some or all employeesNote: Results reflect a total of 142 survey participants responding on behalf of their organizations. US organizations represented 47% ofthe sample, Asia Pacific 21%, Africa 5%, Europe 18% and South America 9%. Source: Invesco Real Estate using data from Global WorkplaceAnalytics Fifth Biennial Global Benchmarking Study 2018 and Deskmag’s 2017 Global Coworking Survey.03 A case for co-living

Figure 5Millennial relocation preferencesPercent of survey respondents across 75 countries that would like to work outside their home countryAsiaNorth America & the CarribbeanWestern EuropeCentral & Eastern EuropeMiddle EastAustralasia & Pacific IslandsSouth & Central AmericaAfricaTotal(%)71%020406080100Note: Results reflect survey of 4,363 recent (2008-2011) graduates across 75 countries conducted in 2011. Source: Invesco Real Estateusing data from the PwC Millennials at Work – Reshaping the Workplace survey.Access ownershipTechnological advancements that havefacilitated greater work flexibility havealso contributed to a rise in digitallycollaborative forms of consumption thatare disrupting traditional industries.Dubbed “the sharing economy”, theemergence of online platforms thatpromote access over ownership havesprung up with increasing regularityin recent years. This shift has beenparticularly prevalent in cities, driven outof necessity, cost and consciousness, andhas penetrated virtually every sphere ofurban consumption – car ownership hasbeen replaced by Uber and Zipcar, theformer of which, valued at US 76 billion,exceeds the market capitalization of moreestablished transportation companiessuch as Delta and American Airlines;ThredUp and Rent The Runway havesupplanted clothing ownership; Spotifyand Netflix provide content on-demand;LendingClub and WeSura provide sharedaccess to crowdfunding and insurance.The exponential growth of these businessmodels and their adoption by youngurbanites suggests that there is a highdegree of comfort with sharing productsand services. This acceptance hasprompted this same audience to envisagehousing in much the same way; that is, asjust another product to be shared.An affordability impetusThese forces – greater urbanization and anincreasingly mobile workforce that is lesskeen to own – may be enough in explainingthe need for more urban housing options. Buta third component – affordability – is a keyingredient in the recipe for co-living demand.Across developed economies, incomeprogress (the measure of change inmedian real equivalent disposablehousehold income) between generationshas often supported the notion thatthe current generation is often betterpositioned than the last.many Millennials unable to obtain fulltime employment after graduation, aneffect that has continued to truncate theirearning potential. Millennial households inthe developed world earn approximately4% less than Gen Xers did at the same age,which has had a profound effect on thegroup’s unique marriage, childbirth, andpurchasing patterns (Figure 6).More widely though, rents in the mostdesirable urban locations are well beyondwhat is affordable for many, regardlessof age. The longstanding benchmark forrental affordability in the US has been 30%of one’s after-tax pay; yet many pay wellYet Millennials are the exception to this trend. above that for a median-priced apartment.The Global Financial Crisis and subsequent For institutional product, the rentalburden is even greater.period of heightened unemployment leftFigure 6Percentage change in median real disposable household incomebetween generations (1969 – 2014)Age 65 – 69Age 45 – 49Age 30 – 34(%)403020100Silent gencomparedto greatestgenBabyboomerscomparedto silent genBabyboomerscomparedto silent genGen Xcomparedto babyboomersGen Xcomparedto babyboomersMillennialscomparedto gen X-10Note: Before housing costs income, deflated using CPI in each country. Countriesincluded are the UK, the US, Norway, Finland, Denmark, Italy and Spain. Generationsare defined as follows: The greatest generation, born 1911-25; The silent generation,born 1926-45; The baby boomers, born 1946-65; Generation X, born 1966-80;The Millennials, born 1981-2000. Source: Invesco Real Estate using data from theResolution Foundation, Luxembourg Income Study Database, February 2018.04 A case for co-living

Co-living offers many would-be rentersa way to gain entry into the institutionalmarketplace while simultaneously savingmoney in aggregate. Take, for example,a traditional studio apartment comparedto a room in a co-living facility in London.While on a rent per-private-square-footbasis co-living spaces are more expensivethan traditional units, the savingspotential is enhanced via greater spaceand service efficiencies. Most developedwestern markets’ residential offeringsare comprised of very aged housingstock (the median age of occupied rentalunits in the US in 2015 was 42 years).These older buildings are typically lessenergy efficient, which can in turn elevatemonthly utility costs to renters. Theimprovements in efficiencies offered bymodern apartments can offer measurablesavings as it relates to broader utilityusage. Newer apartments in more densebuildings (those having five or more unitsbuilt after 2000) consume on average12% less energy than those built in the1970s; this, despite newer units havingmore energy-consuming devices thanolder ones.5For one payment, a renter gains accessto a fully furnished space that includesaccess to a gym and communal spaces,well-developed programmatic platforms,regularly scheduled cleaning and allinclusive utilities for 20% less than thecomparable studio alternative, let alonethe time saved before move-in (Figure 7).Put another way, a renter making anaverage London income of 37,000would have an all-in rent-to-income ratioof 43.8% in a traditional studio; this ratioimproves considerably with the valueproposition of a co-living facility, decliningto 33.7% of annual income.One may assert then that co-living is borneout of economic necessity. Some mayrightly wonder whether co-living is merelyaffordable housing in new packaging. Withmany institutional investors shying awayfrom engaging in affordable housing for avariety of reasons, a word on distinction isin order.Affordable housing is often used as ablanket term to cover all manner ofresidential product – in the US, it canmean subsidized housing (throughfederal, state or local grants used tooffset rents for select populations), lowincome and rent controlled housing(whereby households making well belowthe area median income have dedicatedand protected housing options), and rentstabilized (whereby households qualify forreductions to market-rate apartments andannual renewals are subject to escalationsapproved by local administration).While these are vital to promoting andmaintaining diversity in cities, co-living isnot beholden to any pricing regulations asdictated by governmental bodies. Thus,while the notion of co-living may havebeen the result of elevated prices, it is notaddressing affordability in the traditionalsense (that is, addressing subsidized orcontrolled). A survey of existing co-livingoperators’ rents today suggests theproduct is not solving for true affordablehousing, but instead is offering adiscounted premium product targeteda specific subset of renters. This alonemakes co-living more akin to traditionalmarket-rate multifamily product, whereowners can determine rent levels andincreases independently.Figure 7The value proposition for rentersApartment rentUtilities, taxes, wifiLocal studioapartment (NW10)FurnitureAnnual gym membershipAgent feeCleaningCo-living (NW10) 20% savingOne single payment– Furnished studio– Utilities, tax, wifi– Cleaning– Gym/spa– Co-working space– Cinema room– Library– Games room– Events– Bar/restaurant– Linen changes18,00015,00012,0009,0006,0003,0000Time before move in: Time before move in:2–3 months24 hoursGBP per yearSource: Invesco Real Estate using data from London-based co-living operator,August 2018.05 A case for co-living

Current market landscapeThe demand drivers of co-living arerobust and not like to weaken any timesoon; yet the asset class has thus farbeen largely ignored by the institutionalreal estate community, save for a selectfew who have embraced the concept andspearheaded its expansion.The most dynamic region in the worldfor co-living is Asia. Invesco RealEstate estimates that more than 500professionally-managed locations existin the region today, with more in thepipeline. The region has exhibited thestrongest growth in co-living spacesglobally and is gaining increasedinstitutional interest from global investors.While it may seem that this notion of “knowthy neighbor” is merely a fresh additive totraditional multifamily marketing, thereappears to be a psychological shift occurringthat suggests co-living may indeed be asolution to societal challenges. According toresearch conducted in the US, loneliness hasbecome increasingly widespread in youngadults, correlated positively with increasedsocial media usage.6 This corroborates theresults of Space10’s (IKEA’s future-livinglab) One Shared House 2030 survey,which suggest the main reason peopleare interested in co-living is because theywant to be social and connect with peoplein a meaningful way.Perhaps most notably is private equity firmWarburg Pincus. Warburg Pincus has beengradually ramping up their investment inAsia Pacific co-living operators Mofangand Weave Co-Living, having investedmore than USD 450 million over the lastseveral years. Mofang is the single largestoperator in the region, with roughly 130locations totaling more than 15,000 units.Weave Co-Living is one of Hong Kong’sfirst institutional co-living providerswith just one operational facility thatopened in August 2018; with the recentcash infusion of USD 181 million fromWarburg, the company intends to increaseits number of rooms from its current160 to more than 10,000 in Asia Pacificgateway cities within the next five years.By comparison, the existing US andEuropean markets combined represent lessthan half of the estimated co-living stock inAsia. Despite a dearth of institutional forrent product in Europe, co-living facilitiesthroughout the region total less than 100as estimated by Invesco Real Estate, withmuch of the existing footprint isolated tothe UK and Germany.Co-Living Spaces is the largest UK co-livingoperator, with 8 locations in England,closely followed by The Collective. Thebetter-known of the two, The Collectiveopened the world’s largest co-livingdevelopment comprising seven buildingshousing more than 730 operating unitsas of 2018. Medici Living, the Germanmarket leader in co-living, has recentlyexpanded from their 15 locations inGermany to include locations in New York,Chicago, the UK and the Netherlands undertheir Quarters banner, putting their totalco-living portfolio nearer to 1,800 rooms.And this number will grow considerablyin the near term. German firm CorestateCapital Holding recently announced itspartnership with Medici Living to investUSD 1.14 billion ( 1 billion) in developingan additional 6,000 co-living rooms inanother 35 properties, with a focus oninvestments in Austria, Switzerland,Spain and Poland, in addition to MediciLiving’s current target markets. The dealrepresents the largest single co-livinginvestment worldwide to date.In the US, the largest operator ofinstitutional-quality co-living propertiesis Common. Com

A case for co-living This document is for Professional Clients only in Dubai, Continental Europe (as . Co-living is an answer to younger generations’ desire for flexibility in cities and more affordable premium living; it is a response to an increasingly . Dubbed “the sharing economy”, the emergence of online platforms that

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