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Hong Kong's Weave Co-Living to invest $500 mil in Singapore via JV

Cecilia Chow
Cecilia Chow6/24/2020 05:41 PM GMT+08  • 11 min read
Hong Kong's Weave Co-Living to invest $500 mil in Singapore via JV
Hong Kong-based Weave Co-Living, a lifestyle-focused rental accommodation provider, is making its debut in Singapore with a planned investment of $500 million. It has found a partner in Singapore-based fund management firm 32RE.
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SINGAPORE (June 24): Hong Kong-based Weave Co-Living, a lifestyle-focused rental accommodation provider, is making its debut in Singapore with a planned investment of $500 million. It has found a partner in Singapore-based fund management firm 32RE. Weave will hold an 80% stake in the joint venture, while funds managed by 32RE will hold the balance 20%. Together, both partners are committing a total equity of $150 million.

“I believe Weave will provide a breath of fresh air to the rental market and co-living scene in Singapore,” says Sachin Doshi, founder and chairman of Weave.

While most co-living operators in Singapore have an asset-light strategy, Weave believes in owning assets. “Our business model is very different and the barrier to entry is high. We are a lifestyle company, but we believe in owning real estate,” says the 40-year-old Doshi.

‘Owner-operator’ model

Weave’s owner-operator business model offers several key benefits, says Jeremy Choy, CEO of 32RE, Weave’s joint-venture partner in Singapore. “Under this model, they are fully in control of all aspects of the repositioning and operation of the property,” he says. “By operating dedicated co-living properties, we believe that Weave can offer its residents a more bespoke community and living environment, which should benefit our joint venture.”

The business model offers upside potential in terms of stable cash flow from property operations, and downside protection through ownership of the underlying assets, Choy notes. “This, we feel, is important because while the growth of co-living in Singapore in recent years has been encouraging, we believe that there are certain gaps in existing ‘asset-light’ operating models,” he says. “These may include the difficulty in managing increases in real estate cost from rental increases and the continued availability of the property when the existing lease expires.”

Doshi has adopted his asset-heavy strategy in Hong Kong since Weave’s inception in 2017. Based in Hong Kong, he was the former head of Asia Pacific real estate for APG Asset Management, the asset manager of the Dutch pension fund giant.

After leaving APG, Doshi originally founded Emerald Lake, a real estate private equity firm, in a joint venture with a Hong Kong family in 2017. With an initial funding of US$60 million, they acquired a hotel in Sham Shui Po in Kowloon next to Prince Edward MRT Station. The property was refurbished and repositioned as the 160-unit Weave on Boundary. Within just three months of opening in August 2018, it achieved an occupancy rate of 95%.

That attracted the attention of New York-based private equity firm Warburg Pincus, which invested US$181 million in the one-year-old company in November 2018. It also has an option to invest a further US$232.5 million as Weave expands its footprint to other major gateway cities across Asia Pacific. After Singapore, Doshi has set his sights on Australia, South Korea, India and other key markets in the region.

Hong Kong portfolio

In Hong Kong, the roll-out of the maiden Weave on Boundary was followed by the second property, the 95-unit Weave on Baker in the Hung Hom area, which opened in November 2019. The property is located within a seven-minute walk of the Hung Hom MTR Station and is near Kai Tak (the former airport), a major gentrification area served by the upcoming Kai Tak MTR Station on the Sha Tin to Central Link.

The third property in Hong Kong, Weave on Anchor, is slated to open in August. The 200-unit property is the largest in the portfolio to date, in terms of number of units, says Doshi. The property is located in Tai Kok Tsui and within a five-minute walk of the Olympic MTR Station. It is a refurbishment of a former hotel on Anchor Street in West Kowloon.

In the pipeline is a fourth property, the 120-unit Weave Suites on Queens in Sheung Wan, a hipster neighbourhood on Hong Kong Island.

In Hong Kong, Weave has focused on acquiring hotels, serviced apartments and residential properties en bloc at or below land cost. It then adds value by refurbishing and repositioning these assets to enhance both return on investment (ROI) and capital values, according to the firm. Today, the company owns and manages a portfolio of six properties with over 600 rental units in Hong Kong, valued at about US$300 million ($416.6 million).

Based on its existing portfolio in Hong Kong, Weave has a proven track record in terms of increased length of stays — from 2.5 days as a hotel or three months as a serviced apartment in the past, to an average of 10 to 12 months under Weave’s rental accommodation model. Net operating income margins improved 15% to 20% subsequent to the makeover. Occupancy rates averaged more than 92% last year, says Doshi.

Weave has also been able to optimise expenditure through the introduction of digitalisation tools such as wireless door key access and residents’ app for rental payment, booking of events and additional services. Repairs, security, cleaning and other services have been centralised to serve multiple properties. As such, Weave has been able to keep a lean team of just 36 to date.

Significant stake

Doshi knows only too well the perils of being subjected to the vagaries of a private landlord. “The owner could sell the property or unilaterally increase the rent,” he says. “And there are always disputes over what costs ought to be borne by the landlord or tenant.”

Another major reason for wanting to take on a significant stake in joint ventures is to have greater control over the design, management and use of space in order to create a product that the market wants, explains Doshi. “We have to design the space from ground up: the amount of shared and private space needed, the kind of services we want to provide and customised furniture to suit the space,” he adds.

In Hong Kong, for instance, people still want their bedroom and bathroom spaces to be private, even though they are open to sharing the living and dining areas, kitchen or recreational facilities. Most of the accommodation units at Weave’s properties are therefore designed for single occupiers. There are also dedicated women-only floors. In the upcoming Weave on Anchor, besides single occupiers, there will be units that cater to double occupiers and are suitable for couples, says Doshi.

At the peak of the social unrest in Hong Kong in 2H2019, Weave still enjoyed an occupancy rate of more than 94% across its properties. “In times of uncertainty, people want to have a sense of security,” he adds. “All our properties have 24-hour security and CCTV, so there’s an element of safety. Residents found comfort in staying indoors as they were still able to talk and interact with other residents in the community.” Weave on Baker, which opened last November, was therefore able to break even operationally within a few months.

Weave’s cash flow profile is more similar to that of residential rental property owing to the longer lease tenures and income stability relative to hotels. Return on investment (ROI) for stabilised Weave co-living assets is in the range of 4% to 4.5%, reckons Doshi, which is higher than the 2% to 3% ROI for the typical residential rental and hotel assets in Hong Kong today.

According to Doshi, about 90% of the residents in Hong Kong’s Weave properties are professionals and only 10% are international students. The split between expatriate residents and locals is 60% to 40%.

‘Value for money’ co-living option

“In Singapore, existing co-living products cater to a more transient population,” observes Doshi. “Our offering is more of a home. Weave residents in Hong Kong sign up for 10 to 12 months and end up staying longer. It has high brand stickiness.”

Doshi intends to continue his model of offering “value for money” rental accommodation in Singapore. “By providing value-added services for the rent, there’s greater certainty in terms of monthly rent that residents pay,” he says. Target monthly rental rates for the co-living units are likely to be on a par with those in Hong Kong, and predominantly in the $1,600 to $2,500 range.

Weave’s entry into Singapore has been “fortuitous”, reckons Doshi. “We held the view at the start of the year that there would be a lot more opportunities in Singapore,” he explains. “The property market has been reasonably robust, but we were beginning to see signs of a correction. The next six to nine months will present a very interesting window of opportunity for us.”

In Singapore, Weave’s initial target is to have 600 to 800 accommodation units, says Doshi. The firm has appointed Kemmy Sim as vice president of operations to lead the team in Singapore. Sim was formerly head of operations at Login Apartments, a co-living operator in Singapore which had its origins in Shanghai and was formerly known as Mamahome.

32RE will be the acquisitions and project manager for the joint venture in Singapore, says Choy. “We will draw on our experience and network in Singapore to acquire and deliver the properties to Weave’s design and brand specifications for them to operate,” he adds.

The joint venture’s strategy will be similar to the one adopted by Weave in Hong Kong. “Covid-19 has brought about many challenges for the tourism sector in Singapore,” adds Choy. “We see opportunities for us to value-add by potentially acquiring hospitality assets for conversion to co-living.”

Besides hospitality assets, Weave will also consider residential en bloc opportunities. “We are very open-minded,” says Doshi. “With our joint venture in place, we can explore opportunities together.”

‘Cashed-up and waiting to buy’

A number of hotels were put on the market before the Covid-19 outbreak, for instance, the 138-room Porcelain Hotel on Mosque Street in Chinatown that was put up for sale by expression of interest jointly by CBRE and Edmund Tie in February. The price tag on the hotel is $115 million or $830,000 per key.

Last year, average occupancy rate for hotels in Singapore was 87.1%, according to Singapore Tourism Board data. In January this year, it was 83.3%. By April, it fell to 41.1% due to travel restrictions and the measures during the “circuit breaker” period.

“Pre-Covid-19, hotel occupancy rates typically averaged about 80%,” says Galven Tan, deputy managing director, investment sales and capital markets at Savills Singapore. “Co-living and residential rental properties are likely to see higher occupancy rates and more stable rents, with lower operating costs compared to hotels.”

Co-living residential assets are still untested in Singapore, as there has not been any sold en bloc to date, observes Tan. However, such properties are likely to see higher yields in excess of 4%, compared to freehold hotel assets that previously traded at 3% net rental yields, and residential assets at 2%, he estimates.

Buying residential property en bloc will be tougher, given the property cooling measures introduced in July 2018, whereby corporate entities buying residential property have to pay a 25% additional buyer’s stamp duty. Borrowing limit has also been capped at a 15% loan-to-value ratio.

There were some exceptions. Last year, Singapore-listed Fragrance Group purchased two neighbouring apartment blocks, namely, Waterloo Apartments and Min Yuan Apartments, in collective sales. The group obtained URA’s approval to amalgamate and redevelop the two sites into a hotel property.

Not surprisingly, Savills’ Tan is optimistic that investment sales activity is likely to pick up in the coming months. “At the moment, underwriting income for the next 12 months is a challenge — because of the Covid-19 outbreak and phased reopening of the economy after the circuit breaker,” he adds. “But most private equity funds are cashed-up and waiting to buy.”

Weave and 32RE are examples of such “cashed-up” private equity funds on the prowl for assets. “Our strategy is straightforward,” says Doshi. “We like to be in locations where young Singaporeans and expatriates want to be, and to create a community for them.” As such, he is interested in prime locations such as the Newton and Novena area, River Valley, East Coast and Tanjong Pagar. “We are looking at core locations that are close to public transport and amenities,” he says.

As Singapore goes to the polls, economy, not votes key to where STI is heading.

This story first appeared on EdgeProp Singapore.

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