Startups have begun to spot an opportunity in rental housing and are unleashing new experiments with all the unsold real estate
Globally, co-living is hardly a new phenomenon, but high property prices and the millennial propensity to rent has given a new lease of life to the sector
Aditya Jain did many rounds of paying guest (PG) facilities before he zeroed in on Oyo Living’s new, shared living facility in Bengaluru’s AECS Layout. He has taken up a bed in a twin-sharing room in a four-storey building at a monthly rent of ₹9,000.
Jain, 27, who migrated to Bengaluru from his home town Jaipur last November and works at privacy-centric communication startup Clevert, says he didn’t like the quality of the crammed PG rooms.
“The rent [at Oyo] is a bit on the higher side in this property, but after a day’s work, you want good sleep (sic) and a clean place. My office is just a kilometre away and I usually walk to work. In the weekends, some of us get together and play foosball or other indoor games in the community area. There is also a kitchen which we can use, and I love cooking," he said.
AECS Layout in Bengaluru’s eastern edge is a bustling residential area, dotted with scores of buildings offering PG accommodation. They charge between ₹5,000-15,000 per month for an all-inclusive rent and food package. It’s convenient for singles and millennials, given its proximity to tech parks along the Outer Ring Road, the startup hub in HSR Layout, and the office hub further east in Whitefield.
But there is a new game in town beyond the PG ecosystem, with startups making a play on housing, of all things. The Oyo Living rental space which Jain now calls home opened sometime in mid-2018 and is part of over 2,500 beds that the company manages in Bengaluru. But why would Oyo Hotels & Rooms, the country’s second most valued startup, venture into long-term, fully managed housing rentals for the millennial cohort?
The simple reason is that almost every major Indian city has its own version of AECS Layout—geographies where young men and women battle it out in a landscape dominated by brokers, crammed housing, arbitrary rules, and an air of uncertainty. India’s real-estate market is notoriously flawed. While Indian cities have about 9 million vacant houses according to Census 2011, thousands of people make do with no housing or bad housing. In many ways, a thriving rental market is one way out of the mess since a monthly payment is a far more affordable prospect for most Indians, especially young people who are at the start of their careers.
But the rental market is largely fragmented and unorganized. The build-to-rent model that has worked well globally in many countries hasn’t even scratched the surface here. It is a space ripe for disruption.
And in the past 3-4 years, a slew of startups have begun to do just that, particularly targeting young adults and millennials (those in their 20s and early 30s) who need a place to stay when they move out of their parents’ nest or are moving to a new city.
Commonly termed “co-living facilities", these offer the vibe of a hostel with fancy facilities—the living spaces come with a shared laundromat, gym, Wi-Fi, kitchen and housekeeping.
“Housing is a complicated, structural problem to solve," said Kavikrut, chief growth officer, Oyo Hotels & Rooms.
“You deal with a network of people—owners, brokers, and friends—who tell you which area to live in and where not to, and then you make multiple visits to these properties, and then you think of deposit, advance and furniture. We just want to make living easy. There is a growing trend of more consumers who want on-demand homes or homes not fully committed for long leases," he added.
In a short span, Oyo Living has opened 150 properties with 10,000 beds, including studio apartments and one, two and three bedroom apartments on a shared and private basis, in Bengaluru, Noida, Pune, and Gurugram. The company plans to expand to the top 10 metros by 2019-end with over 50,000 beds.
Frustrated with the existing options, young people are clearly opting in.
A December 2018 survey by property advisory Knight Frank India observed that 72% of millennials gave co-living spaces a thumbs-up and over 55% respondents in the 18-35 years age bracket were willing to rent co-living spaces. The survey, which spanned India’s top cities, noted that the sweet spot for rentals was a monthly outflow of ₹ 10,000 to 15,000, while proximity to work and social infrastructure remained top priority for millennials.
Disrupting shared living
When home rental network NestAway Technologies Pvt. Ltd ventured into the sector in 2015, a first-mover of sorts in the structured shared rentals business, many housing societies in Bengaluru did not allow single men or women, recalls co-founder and chief executive officer (CEO) Amarendra Sahu.
“That anxiety is down by half today. You name any large society in the city, we are either there, or negotiating and approaching them [to see] if we can be there. We house over 20,000 single women. At least two out of ten owners are okay with not asking for a huge deposit. In 2-3 years, there could be a zero deposit scenario. It’s a significant shift. The market is changing and I take absolute pride in that," Sahu said.
In the last four years, NestAway has raised around $94.2 million from marquee investors and has over 55,000 tenants living in 25,000 plus homes across 12 cities. It hopes in the next five years, at least a million tenants will call NestAway spaces their homes as the company is slated to enter 10 more cities, including Chennai, Kota and Mysore, soon.
Much has changed due to these market disruptors, even if the overall number of structured rental space providers remains small. From demanding a 10-month deposit from tenants, today some owners have settled into a newer system of two-month deposit and a month’s rent in advance. The interiors are mostly customized for the youth; communication between inmates and the operators are transparent on an app; and the smallest details are taken care of.
Unlike the poorly governed rental agreements of yesteryears which were largely facilitated by brokers, rental agreements between owners and tenants are now framed by lawyers. In NestAway, the dispute resolution mechanism for rentals is governed by arbitration which is a business practice seen in large companies and businesses, Sahu said.
Nikhil Sikri, co-founder and CEO of co-living startup Zolostays Property Solutions Pvt. Ltd which manages over 16,000 beds in six cities, says they want customers to focus on their work and leave the rest to them.
“We are not just a rental platform. We want to build communities. The needs of the customers are fully managed by us and that’s what differentiates us. We believe it is the customer experience that will determine who survives in the long run."
The home renting space is a $32 billion market, according to FastFox, a startup. Thus, it is no surprise that more and more startups are entering the business, and attracting both domestic and global investors. Even persistent problem areas like student housing are beginning to receive attention as a result.
Delhi-based student housing startup Stanza Living, which is backed by Matrix Partners, Accel Partners and Sequoia Capital, manages 2,000 beds mostly in Delhi-NCR and has another 10,000 beds that will be launched across cities in the coming months. The company’s co-founder Anindya Dutta says while its offerings are similar to co-living, it’s a specialized asset class and the solutions are unique to the needs of students.
“Student housing is an estimated $15 billion market in India and people often don’t understand the magnitude. We focus on a technology-first approach and have a consumer-facing app, where we collect feedback daily," Dutta said.
Globally, co-living is hardly a new phenomenon, but high property prices and the millennial propensity to rent rather than buy has given a new lease of life to the sector. In expensive cities like Singapore, Hong Kong and London, the market for shared-living residences is only growing, building new communities of people around a common kitchen and leisure areas.
While co-living may be the flavour of the season, there are enough uncertainties. Creating a hassle-free product for customers, and to be able to scale up in the rental business just because we have done it in the hotels’ space is not going to be easy, said Oyo’s Kavikrut.
“Negotiating with consumers and asset owners to move to a single-party, single-window system is a change in mindset that hasn’t been done before. Asset owners are used to 10-month, long-term security deposits and are used to talking to multiple brokers and consumers. What we are trying to assure our consumers is quality. We want to assure that this switch works when you press it," he said.
Sahu said NestAway doesn’t believe in the co-living or student-living model but calls itself a living solutions provider that creates affordability and flexibility through different rental formats. Its portfolio is split between shared rentals targeting millennials and family homes, which could be furnished if required.
“For long-term stays, there needs to be flexibility and we don’t believe in over-serviced buildings with a large number of homes. Currently, co-living essentially indicates more expensive, serviced homes which don’t feel like homes," explained Sahu of NestAway, which has shared rentals starting at the ₹6,000-7,000 price point.
The real estate trigger
With the government not having succeeded in facilitating the creation of rental housing stock and traditional developers largely staying away due to low yields and returns, the new wave of shared or co-living could yet make an opportunity out of the spoils of the real estate slowdown—ready, unsold inventory.
Noida, in India’s largest and worst-affected housing market, has a large number of buildings that are ready (sold or unsold) and waiting to be used. Oyo Living has been in talks with asset owners and developers, who have inventory that could be used for rental housing.
“There is a very large amount of under-utilized real estate across large cities. The vision is that developers with assets should have a partner. We want to be that partner," said Kavikrut.
“...We evaluate the location, the way the asset has been built, and the owner’s choice and then decide what is best. For a ready building, we don’t need to change anything or break anything. We are happy to take up a large tower, full of two bedroom units from a big developer and concentrate our manpower, energies, resources there…" he added.
Though ready-to-move-in projects and projects nearing completion have seen some interest from homebuyers in the last year, unsold inventory as of December 2018 in the top eight cities was at 673,000 units, according to Anarock Property Consultants.
Unsold, ready real estate inventory could be easily spun-off into shared or family rental facilities, which are mostly set up by these startups that often take the entire building on lease.
Ultimately, the problem of housing needs some sort of a fix simply because it has broader economic implications. When people have the certainty of finding good quality rental housing, they are often more amenable to move to another city and take greater risks in their careers, according to a slew of studies in other global cities. Adequate rental housing options can thus integrate the labour market better and boost overall economic activity. India, however, has been moving in the exact opposite direction. While 54% of city dwellers lived in a rented house in 1961, that share crashed to 28% by 2011, according to the Economic Survey 2017-18.
A co-living model which works for both the owner and the rentier could flip the script and alter India’s housing ecosystem. The Knight Frank report cited above points out that a stable co-living facility can generate net yields of approximately 12% while rental yields from a traditional one bedroom apartment remain at 1.5-3%, simply because the cost of shared spaces such as kitchen and living room are amortized over a greater number of bedrooms. The country’s economic growth story slowly turned the idea of the great Indian joint family into an anachronism. Perhaps, to sustain and accelerate that growth, more Indians need to start living together in joint spaces to create the modern equivalent of a joint family.
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