Hotels are finding room for co-living spaces

Hotels are increasingly being turned into co-living spaces in markets where institutional investors are hunting for cheaper alternatives to residential conversions and high rental growth potential.

In June, a US$200 million joint venture between asset manager PGIM Real Estate and co-living operator Weave acquired Rosedale Hotel in Kowloon, Hong Kong, with the intention of converting the 435-key property into a co-living property.

Meanwhile, in Singapore, real estate management firm LHN Group has invested S$90.5 million (US$65.5 million) in the past three years to acquire properties under its co-living brand Coliwoo — with its latest two Amber Road properties also converted into new co-living offerings.

Behind the deals are favourable tax rates in the two cities. Lower taxes on the purchase of hospitality assets compared to residential assets — which are subject to higher transaction taxes that decrease investment returns — have made hotels the preferred option for asset conversion, particularly in Singapore and Hong Kong.

Both markets have seen a slew of conversions of hotels into co-living properties, where private rooms are offered with shared common areas.

Unlike most of Asia Pacific, where these modern communal living properties are widely considered multifamily assets, Singapore and Hong Kong stand out as exceptions. This has lent momentum to the co-living trend that first found its footing in Europe and the U.S.

The rising popularity of co-living is down to the convergence of two factors, according to Noel Neo, Head of Singapore Mid-Markets, JLL Hotels & Hospitality Group.

“One reason is the stark rise in residential rents across the region over the past few years,” says Neo. “In the case of Hong Kong, another factor is the income loss of underperforming hotels which were first hard-hit by social unrest and subsequently the pandemic.”

Bright spot

The strong interest in co-living assets comes amid a muted second quarter of investment activity as the market adjusted to tightened financial conditions, JLL data shows.

“Capital remains committed to the Asia Pacific real estate market, but deployments will be more selective,” says Pamela Ambler, Head of Investor Intelligence & Strategy, Capital Markets, Asia Pacific, JLL. “Investors are playing the long game and pricing in financial market tightening to any investments for the foreseeable future.”

Despite the outlook, Neo believes it will do little to dampen the growth prospects of co-living in the long term.

“There is clear demand for co-living offerings with professional management and quality assurance that give tenants comfort, while plugging the gaps and inefficiencies of traditional housing models,” says Neo.

“We expect this demand to spark a broader push from institutional investors to transform hospitality properties into co-living spaces.”