Hong Kong is renowned for its unattainably high home prices. For millennials in the territory, owning a flat in the near future remains a long shot. With new co-living options providing a way through for residents, new real estate opportunities exist for developers, owners and operators.
"Cheaper housing accommodation compared to individual rented units is the key reason behind the high demand for co-living spaces."
While nominal wages in Hong Kong grew 45% in 2009 to 2017, income growth has still fallen behind rocketing rents for mass residential properties, which increased 102% in the same period. In a global survey released by US research firm Demographia in January 2019, Hong Kong retained its title as the world's least affordable housing market for the ninth consecutive year. The average price for a home is 20.9 times the annual household income.
As a result, many millennials have been drawn to co-living arrangements, ranging from a Japanese-style capsule with measurements of about two meters in length, one meter across and one meter in height, to pricier options like single and double rooms with packaged wardrobes and desks. Those who are luckier may be able to afford an ensuite bathroom.
'Live out your dreams'
The opening of M3 in 2015, one of the first co-living spaces in the area, started the trend. Since then, several big ticket co-living operators have made their mark in the Hong Kong market, including the Nate (as supported by District15), Weave Co-Living, Slash Living and Ovolo. The number of co-living schemes has increased by almost three times in only two years, according to real estate firm Jones Lang LaSalle (February 2019).
Cheaper housing accommodation compared to individual rented units is the key reason behind the high demand for co-living spaces. This particularly applies to young professionals and university students. But more recently, co-living spaces are also rising in popularity because of the lifestyle they provide.
The concept of having communal living rooms, kitchens, gyms and event venues provides a sense of community to residents. The communal approach provides them with spaces to exchange ideas and experiences; this is the same reason why the co-working industry has boomed in Hong Kong in the last few years. For instance, residents of a new property in the former airport area of Kai Tak, from co living brand Oootopia, use a community-focused app to find out about co-living events such as whisky tastings and game nights.
Oootopia describes itself as "a newly evolved serviced residence designed for like-minded individuals looking for an independent lifestyle." It has a diverse spectrum of residents including start-up entrepreneurs, fashion designers and bankers. This suggests that co-living not only attracts and facilitates interaction among people in their own sectors but across different sectors, too. One of the company's taglines is Live Out Your Dreams.
The landscape of co-living
The target groups of co-living spaces are young professionals and students. Location is a prime consideration. Property owners have therefore invested to convert residential blocks into affordable communal spaces in residential areas with a strong local connection such as Mong Kok, a busy shopping district in Kowloon, or Hung Hom and Shatin, which are neighborhoods close to universities (there's a lack of dormitories for universities but a high number of international students). Weave Co-living, which is backed by Warburg Pincus, acquired a 13-storey building in Prince Edward, another busy area in Kowloon.
Co-living space operators are bullish in the market. Singapore co-living enterprise Hmlet, which entered the market by acquiring 'we r urban' and adding 30 locations to its co-living space portfolio, is reported to be opening two new en bloc buildings in Tin Hau and Mong Kok soon.
Instead of owning the properties, operators generally prefer to be asset light. They enter into a head lease with the asset owner, then sub-lease or license individual units to their residents, providing different ranges of services. Profit sharing agreements are also common.
In addition to investors, residential property owners and co-living space operators, hotel owners in non-core tourist areas are also drawn to the opportunity. They have started to explore the idea of converting properties into co-living spaces, especially stimulated by the changing travel patterns of young professionals and a fall in the number of mainland tourists. A recent example is the opening of Mojo Nomad Aberdeen Harbour in Wong Chuk Hang, an up-and-coming gentrified area, with 65 rooms and 250 beds. This created a hybrid of hotel/co-living spaces. It has the advantage of a hotel license, which provides more flexibility in catering for short-term stays. Other co-living space operators can only offer packages with a minimum of 28 days, as restricted by local law.
"Co-living will become a driving force in the Hong Kong property market in the face of never-ending demand for more affordable housing"
Developing in the right spot
Owners and operators need to choose a site carefully before turning it into a co-living space. Even though there is no specific law on co-living, the use of land and buildings is restricted by, amongst others, the land grant and occupation permit, which govern the user of the land and building respectively. Residential buildings should be a safe choice, whereas a land grant and occupation permit designating the use as a hotel will be less certain. Certain waivers on land use and approvals on building specifications may be required.
Hong Kong also has many old privately-owned industrial buildings and there's been an impetus from the government to utilize industrial buildings, especially for developers to renovate them into transitional housing. However, the prospect of turning industrial buildings into co-living spaces remains bleak because of the various technical requirements that can add to the costs of refurbishment, and the fact that the titles of many of these industrial buildings are split, rendering their conversion into co-living spaces difficult.
Dealing with legal issues
Providing sleeping accommodation in Hong Kong for a continuous period of less than 28 days is subject to local licensing restrictions; a hotel or guesthouse license is required. At the licensing level, the owners and operators of co-living spaces need to make sure the leases or licenses are compliant. Depending on the business model, you can explore obtaining hotel or guesthouse licenses when preparing for the refurbishment of a property, or simply choose properties that are already licensed.
If operators take a head lease from the property owner and sublet or license individual units to residents, they must be savvy in their legal arrangements at both ends. Hong Kong leases are landlord-friendly and usually contain a plethora of tenant restrictions, the more relevant of which include permitted use and subletting rights. In terms of permitted use, operators need to think above and beyond. The conventional description of 'residential' may not fit anymore. Will a coffee shop be put in place at some point? Will the communal space be used as an event space? These elements, which should mostly be based on what the services currently are and where the operators want to expand to, should be reflected in the head lease.
As for relationships between operators and residents, this is mostly documented as a license. It's common and preferred by operators since a licensee enjoys fewer rights than a subtenant and head leases generally restrict subletting.
For their own protection, operators will want a handsome security deposit as well as generous rights to terminate and recover possessions in case of breaches by residents. After all, similar to the co-working business, operators generally sign up for a long head lease and make their profits through shorter term licenses with residents. Therefore, they must have comprehensive recourse in their legal documentation with residents.
Hong Kong's co-living spaces will continue to expand in the foreseeable future. In fact, some observers believe that co-living will become a driving force in the local property market in the face of never-ending demand for more affordable housing. While the market expands, it will be interesting to see whether local laws also step up to regulate the various activities involved, whether the co-living concept will merge with the thriving co-working market and if so, the legal challenges ahead.