China's experience with co-living should be a warning for tenants as well as companies in India

• China's push for rental housing startups ended up pushing local rentals through the roof, according to a Wharton University report.
  
  
• OYO, Nestaway, CoHo and Lemon Tree Hotels are working on similar models in India.
  
  
• The report recommends mortgage trusts as a solution to keep rents under check and still allow co-living to be a viable business model.

India's largest budget hotel chain is ready to kick off it's new venture, Hamstede, where private equity major Warburg Pincus will be a majority shareholder. "The board (of Lemon Tree Hotels) has approved an initial investment of $5 million," Chairman and Managing Director Patanjali Keswani told Business Insider. The company will have a 30% stake in Hamstede.

And it's not the only one. A whole host of startups like OYO, CoHo, and Nestaway are growing fast. Consulting firm PwC has pegged the market for urban residential housing at $13.5 billion. Delhi-based CoHo had estimated the co-living market in India at $10 billion in 2016.

The model that Hamstede is built on is derived from the successes of three Chinese companies offering co-living spaces Mofang, Nova, and Zirooms, and another startup based in Hong Kong Weave. Warburg Pincus is an investor all these companies and all these firms played a part in the rental housing boom in China in recent years.

The Chinese experience with co-living has an ominous sign for Indian tenants. President Xi Jinping pushed for the rental housing boom but it backfired. Despite the increased supply of homes, rents in China’s major cities soared in the double-digits. While the companies' valuations spiked, accommodation became unaffordable for many students and young professionals.

In some cities, rents increased by as much as 30% between 2017 and 2018, according to a study by Wharton University released in March 2019.

How co-living business works

"Today if you live in Mumbai, and you work in Lower Parel, you cannot afford an apartment there. Your apartment will be in Borivali and travelling two hours one way everyday. I will put up a co-living space very close to Lower Parel but the trade-off is I will give you a far more compact living area, where you spend the night. The common area will be very social, where youngsters can hang in the evening, with a living room and an open kitchen and so on," Lemon Tree Hotels' Chairman Patanjali Keswani said explaining the model to Business Insider.

However, in China, the rush build capacity home-owners borrowed heavily and companies bid generously for land parcels. The excess cost was passed on to the tenants, the Wharton study showed-- an important lesson as Indian startups chase the same opportunity.

Big money is chasing these new co-living ventures. Not just Warburg Pincus, Tiger Global, and Singapore sovereign wealth fund GIC are all invested in the idea in different countries. As India opens up to co-living, tenants will be looking for affordability, particularly in big cities like Mumbai where rents are already beyond many people's reach.

The solution

The Wharton study recommends securitisation as a possible solution to keep both the rents and the financial pressure on companies low. Companies can raise money against the rents receivable and distribute the income as as dividends to shareholders. In formal terms, this will be a real estate investment trust.

Both Mofang and Zirooms have raised money using this route in China, but retail investors are not allowed to invest in these securities yet, according to the report.

If the experiment helps in cooling the Chinese property market, both owned and rental, this can become a new avenue for financing high-cost co-living projects without adding burden on the tenants. An idea Indian companies can borrow too.

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