Revenue share emerges as preferred structure for co-living operators, property owners

The ongoing Covid-19 pandemic has started to prompt changes in business models of co-living operators as most of the new deal conclusions and negotiations for prospective transactions are focusing on revenue share structures with landlords. While the model existed even earlier, most deals were then concluded with fixed lease commitments and minimum guarantees assured by the operators. In the new business environment, revenue share structure has emerged as the most favored as indicated by all the deals that are concluding with this clause. “There’s certainly a change in mindset post Covid-19. Pure revenue share structures are on the rise as none of us are acting as a buyer or seller in the deal anymore, we are partners now,” said Jitendra Jagadev, CEO of The Hello World, a subsidiary of NestAway Technologies that counts Goldman Sachs and Tiger Global among its investors.

The company has acquired around 5,000 beds in the last 2.5 month taking its portfolio to 20,000 beds and according to Jagdev, all of this new capacity has been added through pure revenue share structure. In the current environment, many landlords found out the hard way that fixed lease commitments and minimum assurance of payout clauses are as good as the balance sheet of the underwriter and therefore are keen on revenue share deals. “The right way forward for the asset light co-living operator is the revenue share with no guarantees that will become common practice but landlords will partner with brands that can deliver on their promises. This will be a new normal and sustainable model,” said Kahraman Yigit, CEO of Olive by Embassy. Yigit highlighted an example of the hospitality industry, where international hotel brands never lease buildings, but instead prefer either management agreement or license their brand as franchise and nobody guarantees anything. The profitability of a co-living operator also varies based on the type of business model adopted.

While few operators followed a fixed rental arrangement earlier, now all of them prefer an asset-light revenue sharing arrangement. In India, shared rental accommodations including co-living and student housing are still in their early stages and have seen several operators mushrooming over the last few years to tap the demand. In the absence of a regulatory framework, various business models have emerged in the market. Most co-living operators in India have so far adopted the strategy of leasing residential units or an entire block from a property owner, and sub-leasing individual rooms to end-users. This allows them to scale up fast, without any assurance of the continued availability of the premises, as most such properties are taken up on fixed term lease. Apart from this, management contract model, franchisee model and hybrid structure that combines some of these options have also been prevalent in this segment