The emergence of co-working and co-living is creating new opportunities in the real estate industry in China, but some investment professionals are wary of investing in these new sectors due to their lack of track record.
This is despite official statistics from The State Information Center of China revealing that revenue from home-sharing grew by an annual 45.7% on average between 2015 and 2018.
Michael Susanto, managing director and head of China real estate for PAG Real Estate, is not yet convinced about the merits of investing in these flexible office platforms.
“It is quite unusual for traditional real estate players to get into the space. We are not actually not a 100% believer in the sector yet but it is a sector that’s worth following,” he told the audience at the annual HKVCA (Hong Kong Venture Capital and Private Equity Association) Private Equity summit on May 30.
WeWork and Airbnb are two unicorns – private start-ups worth over $1 billion – that have established their presence in China. The former now has 79 co-working spaces in the country and China accounted for 20% of the global bookings of Airbnb Plus – the company’s highest-quality and best-reviewed properties – in 2018, its first year in operation, said Vlad Loktev, vice president of product and home operations of Airbnb.
Susanto added that, as a real estate investor, he has always focused on the cash flow from these investments.
“We don’t just look at the blue sky as the potential upside,” he said, adding that the same level of due diligence discipline for other real estate investments would be applied, including negotiating with these companies, to make sure the project has enough downside protection to it.
Andrew Weir, global chairman of real estate and construction at KPMG, believes these new types of real estate investments could have enormous potential in China, but they are still in “fairly early days”.
That's not to say investors should take a wait-and-see approach all the time.
Susanto said that he, as a building owner, has taken advantage of the trend for co-working and that some of the companies providing such spaces in China are now his tenants. He noted that he had taken some of the retail malls in his portfolio that were occupied by restaurants and leased the space and converted them to flexible office operators for double the rents.
“Some of them are truly adding value – they are giving better working environments, better design, better amenities. For us, real estate landlords, they are willing to pay high rents,” he said.
Susanto had a warning, however, for any landlord looking to rent in the sector. “We have to be very careful and selective in finding the right players that are fully funded, and that are not going to be going bankrupt in the next year or so,” he said.
China is still grappling with a slowing economy and a trade war with no end in sight, but pockets of opportunities can still be found in the country’s real estate sector. Asian investors are flocking towards distressed properties.
Charles Lam, managing director of real estate of Baring Private Equity Asia, said that first-tier cities or those bordering tier one and two in China are where the demand remains strong for offices.
He added that other opportunities in second-tier cities lie in other real estate sectors, such as logistics: “The revenue model and the supply demand equation is very different there from those in a first-tier city.”
The panelists agreed that just acquiring properties and leasing them out in China will no longer suffice – investors will need to “get their hands dirty”.
“What's lacking currently is this culture of being a landlord, and if you can manage a building well, you can actually get a lot of value from there,” said Susanto.
Ivan Ho, chief executive of KaiLong Group, said investors will need a local team to do more than leasing, but also reposition the properties or convert rundown buildings into offices for higher rents.