By Céline Léonardi, Head of Wellio, François Roth, Co-founder, Colonies, and Jean-Baptiste Mortier, CEO, Kley, at the Paris Asset Forum >hospitality.
François Roth: it is a new asset class for several reasons. The underlying behind is not related to an age or population class. It is defined as being open to all. It's going to be from the student to the retiree, the senior. We are really on an underlying housing market, on a very deep market. We go to job centres, to metropolitan areas. Behind this, the enormous advantage for an investor is that we have a relationship with him that is tertiarized, which means that he will have a commercial lease, the comfort of a very long-term commitment, with or without an incentive to outperform, for example. In fact, whether he signs with us, a hotelier, a student residence, or a business or offices, it's exactly the same for him. We really do the whole interface between the two. So the underlying risk in the analysis is really that of housing, and the relationship is tertiary for an investor.
But isn't that what we used to do in the hotel business, namely to put an operator level between the customer and the owner?
FR : Completely, and perhaps this is also the case for coworking. The biggest thing we have in common with the two asset classes is that today we have a complete de-correlation between the user's need, which is all-inclusive, flexible, and the investor's need to spend as little time as possible on the transaction and have a very long visibility on his cash flows. So the operator, whether it is co-working or co-living, he takes this risk of vacancy, marketing, management, unpaid bills... and he acts as an interface between the two.
What about co-working?
Céline Léonardi: On the new asset class side, I would not necessarily say that it is a new class but rather an evolution and mutation of workspaces, since we have a new contract system, workspaces being positioned both on dedicated office buildings but also in hotels, so that workspaces become mobile. Indeed, we will get closer to the end user, so more services, more design, more experience. It is an evolution from the workspace to the hotel. Getting closer to the user, how do we do it? For example, Covivio owned the buildings, and still does, but did not have this relationship with the employee, and today, by operating these co-working sites, we have direct contact with the client, which allows us to better monitor their real needs, what services they expect, in order to be able to develop our global office offer.
Are we on a verge of a change in needs on the user side, or are we also on the investor' side, through a new asset class?
Jean-Baptiste Mortier: We are very clearly on this investor aspect. For 30 years in France, especially on the student residence, we have been selling buildings for cutting with as many co-owners as there are lots. Because our children are lots in student residences. We are developing 12.14 m² to be as efficient as possible. We do not ask ourselves how they have changed. Obviously this is true for co-living, because we have a vision that is very close to the client, the one we wanted to have for the student and the one we have today, we share that in co-living. This asset class, which for years has been called a tax exemption tool, we have sacrificed the living environment a little to make tax exemption, but fortunately it existed, because otherwise we would not have 90,000 beds in France for 2.6 million students. But we haven't seen Sale and Leaseback on real estate in 30 years, whether it's co-living or student residence. Of course, it is an emerging asset class, which is attracting investors to France because we are at about zero point. This asset class must integrate many other things, not just housing, which is ultimately only a small portion, because they spend 80% of their time in the student residence, but they will spend a lot of it in co-living, so you have to put something else around it to understand who they are today.
And you who have experience in the student residence, which has led you to co-living today, is it an approach based on need, the customer profile? Or is it not rather a response to the deteriorated returns we had in housing in France today?
JBM: Before that, I hadn't done any residential studies, so I don't provide an answer to a return. Of course, the models have to work. We have heard about co-living in France for years from people who explain to us what it is like when no one has really done it. So the answer is linked to a customer, who is the 25-35 year old today: what does he want? How does he live? What is its community? Where does he want to start his life? Today you can't find a 25msq studio in Paris when you are 25 years old, if you don't have a guarantee from your parents, you have 50 people visiting at the same time... so it meets a real need, but you have to qualify it. We have to qualify the services we are going to make available to them, the supervision,.... we have to qualify so many things that the supports are still quite vague on co-living. But the starting point is the client. In other words, we must ask ourselves who the young person who is going to live his first adventure today, his first home alone, and in what he wants to live. When we ask ourselves these questions and identify the target, that's where we manage to calibrate the real estate that goes behind. But the model comes next. When you start with the customer, the model comes out of it, it necessarily works, and you find the levers to make it work. In France, we first talk about returns before talking about customers. This is not service-centric. We tackle the problem exactly from the opposite side.
On Wellio's side, what was your approach, with the owner point of view that you have?
CL: About three years ago, we thought a lot about innovation at Covivio, both about customer relations and tomorrow innovations. But also about new ways of working, like co-working or homeworking that we heard a lot about. We conducted interviews with more than 60 customers, major accounts. We discussed about their needs, about the changes they had... We designed a project that fitted these expectations, which we called "pro-working"; "pro-working" because it is a hybrid offer between the hotel business and the office business, which are two areas of expertise at Covivio, combining high-performance office space with the design and quality of services, but also flexible contracts in the hotel business. We prepared this offer for 6 months. We opened our first sites in 2017. Today, we have 5 sites in France, including three in Paris, one in Marseille and one in Bordeaux. The next one will be in Milan. We constantly have this exchange with our customers, who are very much counting on the evolution.
In terms of services and products, what is "pro-working"? How is this different from the traditional office?
CL: Compared to the traditional office offer, the contract is different, we are no longer on a lease, so we are no longer obliged to commit to 3, 6, 9 years but it goes from 3, 6, 9 months... so it is the flexibility of duration, but also the flexibility of space. Normally in a traditional office, you lease the surface of the building or the entire floor; there, you can take just the station, so it's the granularity of the contract as well. In terms of services, everything is included, everything is understood: you sit the design is there, the furniture is there, you don't have to worry about buying or reselling the furniture; you don't have to think about the work, amortize the work (because there is the financial question too), or think about everything that is household, services, etc. so it is an all-packaged contract. Then we will add a layer of services, which will be the IT offer, which is very different from the traditional office, and constitutes a great expectation of our customers: Wi-Fi, therefore quality, connectivity. That is the first point. We can also make tailor-made IT offers: cloud, dedicated networks, etc. Afterwards, everything that makes the customer's daily life easier: concierge services, entertainment, conferences, content, and assistance on many subjects on a daily basis.
And all this applies to key accounts as well? Not just the young entrepreneurs, start-ups... that you can have?
CL: We mainly have key account business; 70% of our customers are indeed key accounts. But it depends on the definition of "key accounts" that you have: we can have large groups that have a few jobs, we can have companies that have a significant size... We don't have many start-ups in the sense of leaving the incubator, they don't come right away to these sites, since there is an intermediate phase where they go looking for offices, test their corporate culture, etc. They come when they have a certain financial size in our country. So we have a mix of key accounts - SMEs.
On the co-living side, what are the specificities, the type of products, services? What is the contribution behind it in terms of income, rent bonuses, expenses...?
FR : On the product, we have three main pillars to develop the product. The first is the space. We're not in shared accommodation, nor in the hotel business... For people to want to move together, the first thing to think about is private spaces. Everyone has a real, fully independent apartment, with a kitchen, a bathroom: you don't share, you have a real living space and you are at home. Then, of course, we have a common space, which allows you to have a friendly place, but also destinations, as you have in the hotel business: a sports hall, a laundry room, co-working spaces, restaurant spaces... we adapt according to the site, local demand, and we fill in what is missing in the district.
And in practice, are you the one who operates?
FR : We are operators at Colonies. We have the whole OpCo, we don't have the PropCo, we don't own the walls. We design and operate all the premises for the duration of a longer commercial lease (in Germany we sign 20-year leases). After this, and after the spaces, we have services. The idea is that even before the customer is "happy", on the residential level, the customer is first deeply unhappy. That is, when you arrive in Paris and come from the United States, we don't know how to speak English. You have to go through paper, lose a month, have to collect tons of documents, file 15 files so that we can accept you on one,... so we are trying to solve all this in the easiest way possible. First, you don't need to have an account in France to come to us, you have much lower commitments, and that's all understood. Today, you are almost systematically asked to subscribe to electricity yourself. In principle, everyone needs electricity, so why isn't it included in the rent? We offer an all-included product with all the services that come with it, and, of course, with the community. On the question of the business plan and performance, there are two things to distinguish: OpCo and PropCo. PropCo part, which are the people who will buy us real estate, we serve a premium over the local market. In Paris, we do transactions between 3.25 and 3.70, which is almost 100 beeps above the residential market if you do it alone. That's for the scale. Then there are operations where we do much better. It's also going to depend on the operation we manage to get out. But the idea is that we have a premium offer compared to the local residential market, while we have a relationship that is tertiarized, and on a new promotion operation, we can even recover VAT, for example.
You talk about a premium in relation to the residential market, but doesn't that also reflect an additional risk? With shorter contracts? Isn't it about an asset class that certainly offers more return but also more risk?
FR: We offer additional returns compared to the market because there is a real opportunity, we want to accelerate our development, to be more competitive. Today we think that in terms of risk analysis, it is not relevant, because in fact we "un-risk" a product that is already very low risk. We add an additional interest. Today, in the worst case scenario, if we leave, you find yourself with autonomous msq of floor space in demanding areas. For example, the operation at 42 rue Cambronne (Paris) that we won is 9,000 msq in independent studios, in the worst case you own 22 msq studios in the heart of Paris. There is no higher value per msq. The underlying is super resilient, you have no risk, the huge advantage of co-living in asset class is that unlike the student market, you have zero seasonality. It is full 100% of the year. If tomorrow there are events like a terrorist attack or bad weather -that can have a direct impact on the hotel business- the housing is totally resilient in relation to this information. If the residential sector falls in the demanding areas of Europe, all sectors will have repercussions that will probably be much greater than what the residential sector will have. It is almost the most resilient class. Also you have an asset with a very low obsolescence. Today when you visit an apartment, it is very likely to see apartments where there has not been a single euro invested for 10 or 20 years. Thus the comparables show that unlike offices, which are obsolete in the middle of the commercial lease, on the residential side, this is not at all the case. And this with a market depth that is absolutely titanic. A figure: today we have about 170 people on the waiting list per bed available on average on our residences. Which is huge. We have an occupancy rate between 93 and 95%, but the real rate, and we already have two years of track records on the first residences. We "flirt" with the 100% occupancy rate on all our residences, and without any round-up, i.e. after 3 weeks, we are full.
A word about the performance premium for Wellio?
CL: First, we're going to dismiss Wework, who has been talked about a lot more for governance issues. Also there have been announcements of losses for the last few semesters (more than 600 million EUR I believe, but they explained that it was related to investments in new technologies). But for us, is it risky or not? First of all, we have very high occupancy rates as well -which also "flirt with 100%" in our current cities. Finally, in an economic market that would be a little more difficult, companies say they tend to move towards an offer like ours, which offers more flexibility, rather than committing to very long periods, where that is not necessarily where we are going. So in terms of returns, according to a study by Cushman & Wakefield, it is 25% savings for companies that choose to go for a flexible offer compared to an office offer. For us, this allows us to achieve a margin in relation to the rent of about 20%, compared to a traditional lease offer.
And is Co-living an asset class that will remain in the niche, in large cities, young active people, or will we be able to develop more broadly, have industrial logics, as some players need to have a critical size to be able to invest in terms of volume? Will we be able to develop widely, or will we stay on this targeted niche strategy?
JBM: We need to develop co-living throughout France. There is absolutely no reason why only young Parisians who are starting their professional lives in Paris should have access to housing. The problem exists everywhere. Rents may be a little lower in some metropolitan areas of French medium-sized cities. But we are talking about a category of population that has changed its lifestyles. We are not even talking about rents. When they start their professional lives, 25-year-olds want to live with their community. The very detailed studies we have carried out prove it. We are not talking about a category of Parisian population, well born, well thought out. We are talking about all the young French people who are looking for accommodation in Toulouse, Marseille, Dijon, La Rochelle... And who today have a real problem, whatever the city. It is therefore an asset class that must be developed everywhere. Of course, investors want above all to be present in metropolitan areas. But it's mainly to pull the cap rates [capitalisation rate, editor's note] at the exit on the day you make a Sale and Leaseback. You will have a higher heading rate if you are in Paris or Dijon. If you are only in Dijon and La Rochelle, it will obviously not be the same thing. The portfolio mix at the investor level, and the return (we also own our own walls, so these are considerations we have), is therefore important. As an operator, our objective is to offer this service to all young French people, who deserve it, and not just to target large cities.
What differentiates Kley from Colonies, both in the business model, in what they offer to investors, and in what they offer to their clients?
FR : On the Colonies side, there are not many, but mainly, we are an actor positioned only on the operational side. We are only an operator. We do not have an integrated vertical on real estate and land development. We are only operators for our customers. Then on the product, it's like asking what makes one hotel brand different from another. We're each going to have a concept. We are creating brands in the home, it is something that has almost never existed. It's going to be related to marketing, product, design, experience. Today, we even have some thoughts about olfactory issues. We have to imagine that there will be a thinker who will design a user experience in a housing product where people will spend an average of 12 hours of their day. Starting from there, there will be hundreds or even thousands of axes of differentiation between the different brands, the market is super deep, there will be room for many concepts.
JBM: I will not answer you on what makes us different but I will answer you on what brings us closer. Finally, a number of people take risks. Finally, we are wondering how we are going to make up for our 30-year delay in other markets. Co-living exists everywhere, student residence exists everywhere, no one asks if it is an asset class, if there are operators... the market has already been consolidated three times in England, on a number of operators who are major. Finally, we have people who have asked themselves who the young people of today are, what they need. I think that's what's important. The subject is not a competitive one, because the market is just incredible, it is just to get closer to the customer experience. Who are the young people of today? What should we think about them, and with them.
What about this mutation of the customer experience on the coworking side?
CL: The customer experience will be a key factor to build customer loyalty, ensuring that our customers who come to us stay. We see that they are coming longer and longer, contracts are getting longer. They come not for a transitional period but to stay in the long term. So that's how to build their loyalty. We can see that they are sensitive to everything sensory, like in a hotel. At the beginning you will choose the hotel for the location and the price. But you will come back if you enjoyed the experience: the way you were talked to, the attention, the little care, the detail... It is important for us to take into account all these little details and to apply them in all the points of contact between the Wellio brand and our customer.
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