The rapid growth of the sharing economy, combined with declining yields from traditional real-estate investments, is prompting a surge of interest in co-working as an alternative in Asia, an industry conference heard on Tuesday.

Attendees at the 17th HKVCA China Private Equity Summit in Hong Kong heard the same message from one panel speaker after another: more capital is flowing into Asian real estate, prompting investors to diversify into newer asset classes such as data centres, nursing centres and student homes to boost returns in the face of more intense competition.

“A lot of money managers are finding it increasingly challenging to invest through the traditional route of just buying and selling property,” said Conrad Tsang, founder and chairman of real estate investor Strategic Year Holdings. “They’re turning to alternatives instead.”

Moving down the value chain also helps investors to extract better returns, added Randolph Zhao, vice president at Beijing-based Hony Capital.

“Investors need to stay away from the competition,” he commented. “At Hony, we look to invest in unique situations where we can partner with an operator like WeWork to improve efficiency and returns.”

Hony ranks as one of China’s largest domestic private equity investors and has Rmb50 billion ($7.81 billion) to invest in the property sector. Its investments include US co-working operator WeWork and its Chinese offshoot.

WEWORK SETS THE PACE

Growing interest in the sector was also demonstrated this April, when the US giant bought Shanghai-based Naked Hub for a rumoured $400 million. The acquisition doubled WeWork’s global membership to 20,000. The company has plans to boost it to one million by 2021.

WeWork’s rapid growth and its ambitious international expansion plan have made it one of the world’s most valuable unicorns. According to S&P Capital IQ data, it was valued at $20 billion at the time of its last series G fundraising round in June 2017.

Two months later, SoftBank’s Vision Fund ploughed in a further $3 billion in return for an undisclosed stake.

The speaker panel agreed that the potential for China’s co-sharing office sector is huge, driven by the twin engine of the country’s extremely well funded venture capital industry and the entrepreneurial spirit of the hundreds of millions of young colleague graduates who each want to be the next Jack Ma.

From private equity investors’ point of view, the dynamic is also shifting from investing in homebuilders to operators, which can add value to property developments.

“Property doesn’t have much value by itself,” said Alan Tso, chief executive of China Mini Storage, a Hong Kong-based investment firm backed by Nan Fun Group. “It’s the input from operators which counts.”

Charles Lam, managing director at Baring Private Equity Asia, added that the co-sharing industry is still at its early stages and fast evolving. He noted that investors should be aware of rising demand for more personalised products and services from Millennials and the upcoming Generation Z.

“I think there’s a paradigm shift in consumer behaviour,” he commented. “Operators in the co-sharing and co-working space sector are fundamentally changing the culture of the way we work.”

NICHE ATTRACTION

Increased interest in such assets is part of a clear rise in demand for Asian real estate in general, including niche property assets.

“We are increasingly looking into alternative investment sectors in real estate,” said Rushabh Desai, Asia-Pacific chief executive of Allianz Real Estate. The firm, the property investment arm of German insurer Allianz, is looking to double its allocation to Asia to 10% from 5% in the next three to four years.

“Alternatives are best aligned to the emerging megatrends around demographic shifts, urbanisation, consumption, e-commerce and digitisation,” Desai told AsianInvestor, a sister publication to FinanceAsia, in March.

Yields on alternatives such as data centres can range from 4% to 6% in Tokyo and Singapore, and 6% to 7% for Sydney, as compared to core office yields of around 2.5% in Tokyo and 4.5% in Sydney, according to a late March report by property consultancy JLL.