Is coliving the new rental housing with a progressive twist? Is it the right time to sell your realty investment?
These spaces offer convenience and a new lifestyle for young professionals moving across cities for work
Co-working and car-pooling have become viable options for the millennial workforce, and an exciting new trend - co-living - is also beginning to make its mark with the burgeoning student and working populations across Indian cities.
While it is largely the major cities like Bengaluru, Mumbai, Gurgaon and Pune that began promoting this concept, the demand for co-living spaces is also gradually percolating into tier 2 cities like Jaipur and Lucknow where both working millennials and students are increasingly opting for co-living spaces.
Co-living is much more than a mere bed-and-breakfast deal. These are fully-furnished homes where the privacy of tenants is respected.
Private bedrooms with access to common shared areas like the kitchen and living room are the norm. Such spaces offer convenience and an entirely new lifestyle for young professionals – most often bachelors and singles - who are not keen to change cities because of their work.
Their main concern is finding the right accommodation. For them, co-living is an ideal solution, and conventional paying guest facilities and hostels are gradually giving way to this more sophisticated way of living in a less inhibited and restrictive environment with ample opportunities to mingle.
Current trends indicate that this newaccommodationismore popular with the young and unmarried millennials, aged between 20-30 years.
Professionals who don’t live with their families in the city of employment are also increasingly considering this option. It can safely be stated that the aversion to isolation and loneliness are driving the demand for co-living.
Co-living is still a niche segment in Indian rental housing, and its actual market size has not been well-documentedasyet. Thebest we can do is take some cues from the overall rental market readings.
Today, the overall market share of rental housing in India canbeanywherebetween35-45% of the total residential market. This share is increasing steadily, particularly in urban centres that comprise nearly 70% of the total rental market.
The Government Census maintains that nearly 28% of urbanhouseholds lived in rented houses in 2011, but this number is definitely much higher now.
Thechallenge with arriving at exact figures is that the rental housing market is almost exclusively a private market of several small-scale providers which may not have been recorded.
As per IMF’s last estimate two years ago, India’s residential rental market was estimated to be a more than US $20 billion market comprising of $13.5 billion in urban areas, $0.8 billion in rural areas, and $5.7 billion of vacant properties held by nonresident Indians living abroad.
A NEW PROPERTY INVESTMENT NICHE?
Going by the recent trends, co- living may offer a higher rental yield of as much as 8-11%, as compared to the current average yield of 1-3% in residential properties.
This fact is definitely paving the way for a new asset class in real estate investing. Interestingly, co-living spaces could also bring downtheconsumer’saverage cost of living by as much as 10-15% with optimal real estate utilization and economies of scale.
While informal co-living has always existed, start-ups such as Oyo Living, Nestaway, CoHo Living , etc. bring a more professional and organized way of catering to the accommodation needs of new-age millennials. In fact, a slew of start-ups is now betting big onthis newway of living, heavily backed by investors such as Goldman Sachs, Sequoia Capital, etc.
Not everyone has been able to make a go of co-living plays, and a handful of outfits have already had to shut operations. Like most exciting new concepts, co-living is not without its own challenges.
Chief among these is the high rental values of co-living spaces in comparison to the traditional formats of PGs and hostels. The rentals involved are simply not affordable for large chunks of migrating population, or sus- tainable in the long run for those who are eventually looking to settle down with their families.
Co- living is a good initial option for those migrating to a new city, but once such individuals settle down and start a family in the city, they prefer the more conventional route of renting or even buying an apartment.
With a still-limited spread of takers in India and given that the overall residential segment is still seeing low interest by investors, it will take a little while for co-living spaces to gain the kind of momentum they enjoy in Western countries. Still, co-living is doubtlessly making an impact here and it is only a matter of time before India’s aspirational young workforce and morefocused players in this field give it the boost it requires to become a real market force. Returns from residential sector in the last five years have largely remained negligible or negative. We ask experts what strategy— sell or hold— the investors should adopt in such a situation.
REALTY PRICES UNLIKELY TO GO UP
If the asset allocation suggests that such rebalancing is required in the portfolio, then it may not be a good idea to wait as it is difficult to predict the returns in the short term.
Considering the inventory in metros, continuous additions through new projects and stricter regulations, it does appear that residential property prices may not appreciate much, in general.
Investors canlook at the likely pay off from an alternate investment. Based on the size of the underlying asset, investors can also take help of real estate professionals and get a perspective.
Whether one invests in a financial asset like mutual funds or a physical asset like real estate, the investment horizon should be very long-term, i.e. at least 10-15 years. Often investors expect abnormal returns in a short period based on aberrations in the recent past.
Investors tend to hold on to loss-making investments due to mental accounting as the base price is already anchored in their mind. All asset classes have their own cycles of ups and downs. To keep chasing for highest earning asset class wouldcertainly be a mistake. Such chasing only means higher churn, transaction costs, and taxes. No one can predict accurately and consistently.
DON’T HANG AROUND FOR UNCERTAIN GAINS
While the Indian real estate is improving transparency and accountability after implementation of regulatory policies but overall as anasset class, realty in the last 4-5 years has given suboptimal returns. Long gone are those days where you could flip property every once in a while and make money. This is a longterm market and to generate average returns one has to build the average by staying put.
There is no point in hanging around for uncertain future gains if your current financial return from the property matches your goals. Macroeconomically speaking, India is doing better than it was doing earlier.
The macro benefit should reflect ontheproperty landscape once the dust settles. New consumers have outnumbered the previously investor-driven real estate market, but they demand compact and affordable configurations. So, the demand drivers exist. In case your portfolio really needs an alignment, an exit from your real estate asset exposure is recommended irrespective of current market valuations. A portfolio rebalancing or re-alignment wouldmeanthat the asset mix needs to be optimized.
ALLOCATE MONEY IN BETTER ASSETS
From an investing strategy standpoint, it makes sense to look for an exit at the earliest at one’s cost price and even up to 10%-15% below one’s cost price. ₹100 comingdownto₹90 andthen having a chance to grow at 10-12% return will be a better place to be in than a high probability of flat or 4-6% gain from real estate over a 5-year period. Staying invested to a much higher real estate exit price will have a high opportunity cost and will put one at risk of suffering a long term time correction. Most of our clients who exited real estate 4-5 years back and have reallocated to financial assets have seen benefits in the form of better post-tax returns, liquidity and flexibility. The attack on black money, RERA Act, huge unsold real estate inventory and removal of tax benefits for second home make the case of exit from investment-oriented real estate stronger especially where one has more than 60% allocation to real estate in one’s networth.
Provided one has completed more than two years of holding real estate, exiting now will also enable a person to create a tax shelter in terms of showing indexed long-term loss whenone factors in indexation while filing IT returns.
HOLD ON TO YOUR REALTY INVESTMENT
As of now, the fact remains that developers are finding it difficult to sell their inventory. Situation is forcing developers to reconsider their inventory pricing and resort to lowering of selling rate to maintain the positive cash flow position. The RERA deadlines for developers is also putting them under pressure to sell their stock to maintain the timelines.
Even though new launches have been limited in the preceding 12 months, excess supply persists. There is good probability that this in-flight inventory may get moderately consumed by 2018-19.
In contrast, commercial real estate segment has seen a good demand uptick led by the healthy growth in the leasing activity. Commercial real estate traditionally leads residential real estate and the robust interest witnessed in commercial segment is likely to have a leading effect on residential segment as well. One will however have to wait and watch.
In such times of low sales in the residential segment, a sheer inventory overhang in most of the micro markets and tons of discounts and offers by developers, it is prudent for a residential asset owner to hold on to the investment till the cycle turns and there is an equilibrium between the supply anddemand. Hold on to the torch till you see light at the end of the tunnel.
Coliving is still a niche segment in the Indian rental housing market with its actual size also not having been determined