Your place or mine? China gets cosy with co-living

A race for space

In one of his less controversial quotes, Charles de Gaulle once stated, “China is a big country, inhabited by many Chinese”. It is hard to argue with him. In fact, the last 2200 years of Chinese governance since unification has been a tale of the challenges of controlling, employing, mobilising, educating and feeding the world’s largest population. With the rapid expansion of the Chinese economy over the last 60 years, the steadily increasing population growth rate (with the gradual introduction of the relatively recent concept of “siblings”) and mass urbanisation (the urban population today is 810 million, compared with 170 million in 1978), housing the people can now also be added to this list of headaches.

Isn’t China huge though? And haven’t they built loads of new cities? Yes and yes, but housing development hasn’t always been located where the jobs and demand are (“under-occupied developments in China” has its own Wikipedia page), and arable-ready farmland is in fact currently insufficient to meet future food demands (especially when considering increasing pollution damage). You are therefore left with huge pricing surges in certain areas and serious issues around affordability. Those of you sat in London, Zurich or New York may be unmoved by this, accustomed as you have become to eye-watering property prices, but do your cities have a million people living underground in cold-war era underground bunkers? And are your governments heavy-handedly curbing human burials to maximise farmable land (although, admittedly, to also address the somewhat surprising and state-condemned emergence of funeral strippers)?

There are as many as 200k people living in tiny "coffin homes", in Hong Kong.

These factors have, in part, led to the energetic recent Chinese interest in co-living, which can loosely be defined as "a home where two or more people live together who are not related" and certainly isn’t a new concept. Whenever in history there has been scarcity of space or money there have been boarding houses, dorms, communes, dosshouses, bedsits and hostels.

Same same, but different

The concept has, however, achieved a noticeable resurgence with a modern twist, and the recent growth in co-living in the West has mostly centred around delivering smaller multi-tenant units, with a strong focus on lifestyle, convenience and flexibility. The aim is clearly to capitalise on the increasing trend for everything-as-a-service, the demands of an increasingly "woke" generation and worrying increases in urban loneliness. A cursory trawl through the websites of players in this field quickly yields promises of ”shared environments that unlock inspiration and make every single day extraordinary” and the ability to “live your best life”, catering for “digital nomads” and “the optimists, the curious and the adventurers”. References to community, wellbeing and good wifi abound. The targets are clearly still the early adopters of this new wave of communal living and few suppliers seemed to have scaled significantly yet.

The original woke generation? Young, idealistic, priced out, and co-habiting.

In China, however, there have been more signs of broader adoption and scaled provision, sparked by the aforementioned space pressures and fueled significantly by the two things that underpin almost all successful Chinese growth stories, serious funding and government endorsement.

On the cash front, cheque books have started emerging. Danke recently announced a $500m series C raise to fuel their tech development and growth, and Harbour last year announced a $1.58bn fund to acquire land for co-living developments. Notably, Harbour currently has around 20,000 rooms across 6 Chinese cities, but has recently announced ambitions to increase that to 1m rooms globally (including NYC, Paris, London etc) within 5 years, and appear to have the funds and ambition to make that a reality. Ziroom, however, currently sits at the top of the tree, having raised over $600m last year, and employ a model of buying or taking over properties from landlords, then fully furnishing them in a way that appeals to younger tenants. As with co-working, existing large landlords have been keen not to be left behind, so in-house solutions like Capitaland's "Lyf" have emerged alongside the newcomers.

It is not just the size of these investments that are noteworthy, the funds are increasingly coming from the region’s largest names (Tencent, Ant, GIC, Softbank) as well as from international sources (Warburg Piuncus and Sequoia among them), in both cases indicating that more cash is likely to follow and that the trend is unlikely to ease up.

On the government side, co-living developers are benefitting from pro-renting policies and messaging from Beijing, as well as accelerated approvals, mostly on subsidised sites that are now ring-fenced for rental development, and the fast-tracked approval of securites backed by rental properties. In short, the government has realised that is will be impossible to maintain the extremely high home ownership rate (previously part-driven by the bank-of-mum-and-dad, eager to ensure their sole male progeny can attract a partner in a competitive field) and is adjusting its stance accordingly. In exchange for its support, the government is expecting suppliers to deliver hundreds of thousands of units to the housing stock of high demand areas in the coming few years. The ability to develop whole sites with co-living at the core, rather than trying to retro-fit in around existing building tenants and uses is one of the main reasons that this sector has accelerated so quickly in China and the long awaited release of China's first full REITs will likely drive this further.

Growth, but at what cost?

You would, however, be right to find this mix of fast money, loosened regulation and consumer desperation concerning. The first warning signs have already started emerging, with repeated accusations of price gouging by Chinese operators, and highly questionable practices such as providers taking out loans in the tenants names, with the rental payments in fact servicing these loans, as a method of financing developmments. The tenants, of course, are in most cases none the wiser to the risks they are exposed to. More serious still are the growing concerns around tenant welfare in these hurriedly built and low margin developments, with the death of one tenant last year raising serious questions.

In summary, China is clearly the space to watch as higher density, service-focused living models evolve. It has the government engagement, market size and consumer urgency to allow for large providers to scale enough for the slim margins to appear acceptable and for them to start building brand equity and loyalty. At an earlier stage, but with many of the same supporting factors, is India, also worth tracking. The modern resurgence of co-living in Asia is happening at breakneck speed, and mistakes will doubtlessly be made. It is how they learn from these that will help overseas players succeed in their own markets before Chinese players start looking West...