Reimagining Shared Living Post COVID-19

Note: This article has been published on BusinessWorld and the same is published here with the permission of the owner – https://www.businessworld.in/article/Reimagining-Shared-Living-Post-COVID-19/11-04-2020-188897/

COVID-19 is a Black swan event that takes place maybe once a century. This is, without any doubt, the toughest event that all of us are experiencing in our lifetime. We have never seen destruction, loss of lives and erosion of Economy of this scale ever. Like any other catastrophic global event, it will take time, sweat and tears, but we will get over it!

However, it will leave a very strong impression on Individuals, Corporates/ Start-ups and Governments. Individuals will reassess their lifestyle, priorities, education, career and finances. It will also leave a deep impression on the way Corporates and Start-ups builds products & services, handle customers, do manpower management, and run their operations. It will impact the way they manage their balance sheet, profitability and cash flows. Some of the corporations and start-ups will be forced to go back to basics and build long term sustainable business that solves real world problem. Here are some macro changes that I forsee.

1. It is time for Reality Check and to put priorities in perspective

Post-cold war, Nations and Companies have been investing billions in manufacturing the most sophisticated weapons, fighting wars, investing in space programs, driver less cars and various other ambitious projects which suddenly seems to have little or no relevance. COVID-19 pandemic has exposed how vulnerable the world is. The most powerful countries like US, Germany, Italy, France, UK and China have realized how ill prepared they were to handle a pandemic like the current one. All these countries with, no exceptions, had not acknowledged early warning signals. They all realized that they had grossly underspent in developing their HealthCare eco system like accessible diagnostic centers, Healthcare Insurance, affordable care, ventilators etc.

This is indeed a wakeup call for all Countries and Companies/ Start-ups to put things in perspective and invest their money, time and energy on topics that is critical to survival of human race like Infectious Disease, Healthcare, Extreme Poverty, Water shortage, Pollution, Climate Change, Terrorism so on.

2.Global trust deficit is at an all-time low

Countries have blamed free flowing tourism and immigration as the primary cause of internal disturbances. They feel that they have become victims of free global economy. 9/11 was also caused by less travel restriction which led to a catastrophic event in the US. Post that there were comparable events in India – 26/11, UK, France and several countries. Events of this nature and adverse impact is compelling countries to move from Soft borders to Hard borders.

Last few years, countries have increased protectionism to promote their individual economic and social interests. For all the microeconomic distortions that protectionist policies inflict, there can be benefits in terms of macroeconomic gains: more jobs, more output and a stronger trade balance. Economists, however, argue that Protectionism leads to inefficient producers and smuggling in order to evade them; such distortions reduce any beneficial effects. Further, consumers lose more from tariffs than producers gain, so there is deadweight loss. Recent trends around Insourcing factory production from China and IT/ BPO services from India has also seen a rise in the recent years.

3. More Online Shopping

One of the immediate fall out of social distancing and maintaining personal hygiene will be the need to avoid going to crowded places like Retail Stores, Malls, theatres, Airports, Railway Stations, Bus stands, Banks etc. Some of this can be avoided and some can be reduced. This will lead to adopting online channels of communication and transactions. Although there were many businesses that felt they had already cracked the online shopping code, COVID-19 taxed the systems like never before , as the majority of shopping moved online. Businesses who didn’t have an online option faced financial ruin, and those who had some capabilities tried to ramp up offerings. After COVID-19, businesses that want to remain competitive will figure out ways to have a significant online services even if they maintain a brick-and-mortar location, and there will be enhancements to the logistics and delivery systems to accommodate surges in demand whether that’s from shopper preference or a future pandemic.

4. Work from Home will be the New Normal

For a very long time, working from home was an option. It was exercised when we felt the need for change of scenery or wanted to make a small contribution to the environmental causes or simply when we woke up late. It was suggested but never encouraged. And then suddenly the world as we know it got upended by a tiny virus here, we all are, working from home. It is likely that this pandemic will fundamentally change the way many companies and even individuals will operate in future. COVID-19 has already forced us to react instantly to the rapidly changing scenarios. We all had to hit the ground running and get adjusted to the new normal. All the constraints that had made it almost impossible for us to work from home pre coronavirus pandemic fell by the wayside. This lockdown has also brought us face to face with all the pros and cons of working from home.
And since we simply cannot go back to office when things are not working, we are forced to find solutions for all the problems or at least learn to live with them. The future of work is “Work from Home”. However, this will not totally replace traditional office work but complement the same. It could be that companies will promote 2-3 days work from home depending on the nature of job. Employers on the other hand will put stronger governance and checks and balances to increase productivity and single out offenders.

“Work from Home” is the new normal and a win-win situation for Individuals, Companies and Government/ Civic bodies. Individuals will have a better work life balance; Employers will leverage this to significantly bring down their real estate costs which has always been rising and finally Government will use this opportunity to ease Traffic Congestion and Pollution. This is a blessing in disguise for our urban infrastructure and nature which will get a chance to self-heal.

5. Strengthening Digital Infrastructure will be an immediate priority for all.

COVID-19 caused people to adapt to working from home and in isolation. By forcing our collective hand to find digital solutions to keep meetings, lessons, workouts, and more going when sheltering in our homes, it allowed many of us to see the possibilities for continuing some of these practices in a post-COVID-19 world. The need to travel to other cities or countries will come down drastically and get replaced by video conference or phone call. Zoom and WhatsApp have made collaboration mush easier, effective and inexpensive.

Ability to deliver results in the New world will largely rely on the quality of digital infrastructure you have. First and foremost will be the need to have uninterrupted stable power. Cheap and fancy ornamental Phones and Tablets will give way to reliable, high performance/ storage and durable Laptops and Cell Phones. Internet Connection is the backbone to connecting these devices to the rest of the world. The need to have a faster reliable connection with sufficient bandwidth will become foundation to the Digital Infrastructure.

COVID-19 will have a significant impact in the Residential Real Estate World. Here are some of the key factors influencing Residential rental Market and Shared Living:-

1. Residential will be the focus Real Estate Asset Class

With Brick and Mortar shopping on a decline and folks avoiding public and crowded places, demand for Retail Space will reduce. A lot of Offline stores will give way to Online stores like Amazon, Flipkart, Big Basket and the likes.

With Corporates and Start-ups downsizing their staff and encouraging Work from Home, the need for Office Space in the near term will also see a decline. Office Spaces in the outskirts and with poor last mile connectivity will face the brunt.

This event has confirmed that the demand for essential services will continue and more and more consumers will rely on home delivery and online shopping. However, the larger challenge is the quality of the supply chain infrastructure. Next 3-5 years will see significant efforts in building the supply chain infrastructure which will result in the need for good quality warehouses going up.
With regards to Residential Asset Class, with Work from Home as the new normal, the need for better quality homes at good locations will go up. Folks who stay in makeshift setups like PGs or independent houses, will move to organized apartment complexes to take advantage of the security, safety and convenience. Confident about real estate sector doing well as long as there are “right developers, right pricing and right unit size”, eminent banker Deepak Parekh has said a number of new growth drivers are also emerging in form of student housing, retirement homes and co-living projects.

2.Transition from Buy/Sell to Rentals will accelerate

There has been a continuous decline of sale of properties since Demonetization and implementation of RERA and the slide will only get steeper with COVID-19. EMI to Rent Ratio is 2-3 X, hence Millennials are not very inclined to buy homes and prefer renting. Decline in Launch and Sale of New Residential Properties and poor capital appreciation of Residential Assets has shifted the spotlight on Rental Yield.

Some of the below stats from multiple sources suggests the stress in the Buy/ Sell Market.

•    At end of December 2018, about 9.43 lakh units worth  7.77 lakh crore with 41 months of inventory are stuck in various stages of the project cycle across top 8 cities Liases Foras (2019), RBI.
•    There are 6.73 Lakhs of unsold housing inventory with 85K ready to move in units. ET, 2019.
•    India has nearly 11.09 million urban vacant housing units. Moneycontrol, 2019
•    Nearly 4.7 lakh units across the top 7 cities of India that are likely to complete in 2020 are high risk – ANAROCK, 2020
•    2020 new launches are likely to register a further decline of 25-35%, to 1.7 to 1.9 Lakh units – ANAROCK, 2020

Overall, New Projects will take a back seat in the near term with focus on getting most value out of the existing Asset.

3. Rise of Co-Living

The millennial affinity to rent rather than buy and preference for convenience and sense of community has been a major shot in the arm for the concept of co-living. Change in Nature of work – short term, perpetual transition, delayed marriage and delayed childbearing are some of the primary reasons why Millennials opt for Coliving. It is slowly emerging as the new truth in urban life and hence a game changer in the real estate sector. Shared Residential Rental Market is $4.6 B with a Coliving penetration of 2.3% in 2019 and will be $14 B by 2023 with an 8.3% Coliving penetration – JLL, 2019.

During COVID-19 Pandemic, many of the unoroganised PG operators asked Millennials tenants to vacate with hardly any notice. This has led to higher appreciation of organized startups like Nestaway, Colive, Zolo, YourOwnROOM and others. All these Coliving Operators rely heavily in Technology to power co-living as it provides efficiency, convenience and transparency.

4. Emergence of Alternate Asset Class

While rental yields have stagnated at 2-3% in the traditional housing market, co-living presents attractive returns at 6-8% at a relatively lower risk level, with a potential upside for developers operating on a build-own-and-operate model – JLL, 2019.

Developers are likely to adopt any of the following models (a) Build & operate: Building properties as BTS co-living spaces and managing them as well. (b) Build & management contract: Entering into a service contract with the operator to run the property on a co-living basis
Built to rent is a service driven housing solution where buildings are designed like Executive hostels to accommodate higher density of tenants with functional amenities and social spaces. Works well in well-connected locations.

Conclusion

COVID-19 is without any doubt one of the most difficult event of the century and will impact our way of life and all business sectors. It might be taxing our systems and patience, but it’s also building our resilience and allowing us to develop new and innovative solutions out of necessity. Post COVID-19, a new more efficient Residential Real Estate will evolve with higher efficiencies and long durability.

Residential will one of the most important asset category within real Estate. With New Projects going down and almost a million homes on the shelf and 12 million vacant, it is now a reality that RE Investors will not rely on capital appreciation only. Both Retail investors to institutional investors will now work towards creating a portfolio of rental yielding assets and hence “Rental Yield” will be the driving metrics in Residential Real Estate.

With 40% population as millennials and most of them migrating to cities for better jobs and life’s, Coliving will emerge as one of the hottest sectors with demand for safe, secure and comfortable homes going up. Investors will look at making capital Investment to increase the Rental Yield by looking at smarter configuration (increased tenant density), better maintenance and repairs, furnishing and value-added services. The Acceleration from Unorganized Properties to Organized properties will increase and Co-living will become mainstream in residential real estate and “Rental Yield” will replace “Capital Appreciation”.

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.