In the residential market, co-living – a modern form of housing in which residents share living space and have common interests and values – has become increasingly popular, driven mainly by urbanisation, the lack of affordable housing and technological innovation.

While the co-living concept is more established in America and Europe, the potential for it to take root in Asia is greater, given that nearly two-thirds of the region’s millennials still live with their parents, compared with less than half globally, data from CBRE shows.

According to a report published by JLL last year, younger populations and overcrowded cities make “people in [the] Asia-Pacific [region] the most willing to share their own assets, and receive shared assets from others”. With urban populations in China, India and Indonesia set to grow the fastest over the next 15 years, co-living operators are cashing in on intra-country migration.

JLL noted that India, which has over 35 million tertiary students, yet no major purpose-built student accommodation providers to help house them, is “becoming the trailblazer of co-living” in the Asia-Pacific region. Operators and developers are starting to fill some of the gaps created by a housing market that is woefully underserved by differentiating themselves from other types of rental accommodation.

While the co-living sector is still in its infancy, and there are different definitions and concepts, the overarching aim is to use technology to turn underused real estate into accommodation that is suited to a modern, urban lifestyle that values sharing and collaboration.

Co-living offers flexible and shorter lease contracts that cover all services and move-in requirements. It also generates cost savings for tenants, operators and investors and, crucially, addresses issues of loneliness and social isolation which have become major health concerns, particularly in the world’s megacities.

Beijingers look to co-living as a tonic for urban loneliness

Yet, while there is a real buzz about co-living, and institutional investors are starting to pile into the sector, the enthusiasm is matched by major challenges and risks.

China’s much bigger role in the global economy increases the spillover risks, especially for the rest of the Asia-Pacific region. As JP Morgan rightly observed in a report published on January 24, “the threat from [the] escalating severity of the coronavirus outbreak is focused on Asia and [the] services [sector]”.

Mounting uncertainty about the economic outlook in Asia puts the operational and funding aspects of the co-living model under a lot more scrutiny.

As JLL noted, a key determinant of the success of co-living is operators’ ability to find suitable real estate assets. While there is a growing focus on the conversion of underperforming residential and hotel buildings to co-living facilities, it is doubtful whether developers and investors would be willing to help fund major conversion works at such a perilous time for the global economy, given that they still “need to get more comfortable around the operating metrics of co-living”.

Second, co-living operators, like their co-working counterparts, need to achieve economies of scale to be able to perform efficiently and distinguish themselves from other categories of rental accommodation. As the fierce competition in the market for flexible workspace has shown, this is likely to lead to a wave of consolidation, weeding out weaker players and putting a premium on strong brands.

Third, co-living schemes are still struggling to set themselves apart from other forms of shared accommodation. While one of the key differentiators of co-living is that it caters to a more diverse tenant base that seeks accommodation for longer stays, there is little that distinguishes student-focused co-living from traditional student accommodation.

In Hong Kong, professionals-focused co-living has faced competition from the rapid development of so-called “nano flats”, tiny apartments, often in modern developments, which, according to a 2018 report by JLL, have proved “an attractive rental option for young professionals” due to their relatively low price point.

If the co-working craze is anything to go by, co-living will shake up the residential market. While Asia will continue to provide fertile ground for operators, the challenges should not be underestimated, particularly as the region’s economic prospects dim.

Nicholas Spiro is a partner at Lauressa Advisory