Short flexible leases pose big risk to co-living startups

Short, flexible leases could be co-living’s largest risk factor in its business model, reported The Business Times.

Analysts said despite short and flexible leases being considered as one of co-living’s main draws, co-living startups should be cautious of the volatility in its revenue streams. This is due to a mismatch between shorter-termed rental agreements the startups are offering to tenants and longer-termed leases that the startup signs with landlords.

Paired with a highly mobile target group, such as expatriates and millennials, the co-living business models face unpredictable vacancies and the possibility of becoming liable for their leases without having secured tenants for the whole duration.

A majority of co-living startups rent their residential units from landlords, then later sublet bedrooms in these units, coupled with shared amenities and facilities such as gyms and kitchens.

Just like co-working, co-living aims to create a sense of community among residents via regular community events organised by operators.

Things could get ugly if a downturn hits

Co-living companies permit tenants to lease units for short-term periods, with many of them having a staggered fee structure and featuring lower rates for longer stays.

The startups often sign long term leases with landlords while earning money from low-commitment monthly rents.

Liu Gen Ping, fund manager at Vertex Ventures, noted that a full sublet model such as co-working will have fixed operating costs, making the startups “more vulnerable to a downturn”.

READ: 6 Reasons Why Co-Living In Singapore WON’T Be Here To Stay

“This model is much riskier than co-working since individuals have greater mobility compared to businesses. The risk of coming short on revenue is much higher,” said a spokesman at Openspace Ventures.

A risk-sharing model

Some co-living startups, though, can use revenue-sharing models to reduce risks. Under revenue-sharing lease agreements, the operators pay the landlords a proportion of the property’s turnover.

This turns the pressure over to the landlords, as the income is not predictable and makes it tougher to leverage other financing mechanisms to engineer a stable return, according to Liu.

By offering a potentially volatile and uneven income stream instead of a fixed and steady one, leases like this changes the bond-like nature of property as an asset and into something more similar to an equity.

For co-living startups to operate on models like this, they would need to establish its credibility and have enough scale to attract landlords. It will not help if landlords do not see the co-living concept as taking off here.

High occupancy rates, say co-living operators

Despite the co-living space remaining measured since 2010 with only a few players offering limited units, demand remains high.

Companies such as Hmlet, Cove and Commontown said their occupancy rates are around 90% to 95%, despite having premium rental rates.

These occupancy rates “seem reasonable and achievable”, because the supply of co-living spaces is still limited. However, these high rates might see a decline once the supply increases.

“The key risk is whether they can keep this occupancy rate as high as they scale supply,” Openspace Venture’s spokesman said.

“The co-living model is sustainable only if the model can improve the efficiency in matching its space and the users, and the use of technology is one way to overcome the physical constraints in traditional rental markets,” said Sing Tien Foo, Associate Professfor and Director at Institute of Real Estate and Urban Studies (IREUS), National University of Singapore.

By increasing value, meeting key needs of their target market and maximising cost effectiveness, co-living startups can be inside the sweet spot and generate profit.

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Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this or other stories, email victorkang@propertyguru.com.sg