Branded hostels for students and working professionals are mushrooming across India

Aarusha Homes has around 4,300 beds across 20 hostels in Pune, Bengaluru, Chennai and Hyderabad
Image: Bmaximage

In 2008, when Satyanarayana Vejella started his first hostel in Chennai under the brand name Aarusha Homes, he was wading into an untapped segment of the Indian realty market. Real estate funds and investors were keen on buying office space, residential housing and warehousing, but branded hostels for working professionals and student housing was a neglected asset class.

Professionals and students in India have, for the most part, adjusted with rented houses, paying guest (PG) accommodations or hostels run by their educational institutions where the host provides some basic services like internet, food and laundry.

These arrangements tend to be temporary. Security is a problem and landlords are lax about providing quality service as they are serving a market where demand exceeds supply. “This [market] is tricky as it is two businesses—hospitality and real estate—rolled into one,” says Bharat Parmar, partner at Eduvisors, a consulting firm on education.

Globally, student housing and hostels for working professionals is a $200-billion asset class, according to a report by Eduvisors. The segment has attracted capital from pension funds, private equity funds and sovereign wealth funds, who are on the lookout for long-term steady returns.

In India, however, it is a nascent segment with just a few players and demand is largely met by unorganised players (think individual landlords who rent out their houses to say two or three students).

“This is a market that is crying to be organised,” says Shobhit Maleta, co-founder of the New Delhi-based Indecampus, which plans to set up its first student hostel in Dehradun this year and is also scouting for land for a hostel in Himachal Pradesh’s Solan.

Entrepreneurs Forbes India spoke to see more ventures like Indecampus springing up. They expect at least a dozen chains of hostels for students and working professionals coming up in India over the next five years. This would mainly be in clusters near educational institutions, like Kota in Rajasthan, or in places where there is a large population of entry-level working professionals—Gurugram, Pune, Hyderabad and Bengaluru.

Ashish Joshi, managing director and CEO of private equity firm Landmark Capital Advisors, for instance, is setting up a Rs 500-crore fund to invest equally in student housing and warehousing. While studying the market, he says he was surprised by the tailwinds the business has going for it. “The occupancy rate through the year is a high 95 percent. And even though there are two months of vacation a year for students, the fee for the entire year is mostly charged upfront,” he says.

In addition to setting up its own hostels to get a head start, Landmark Capital Advisors also plans to take over the operation of existing hostels at educational institutions. For this, Joshi plans to tie up with educational institutions and integrate the hostel fees with the course fees, while retaining the hostel under the institution’s brand. According to Joshi, many educational institutions are looking to outsource the managing of their hostels, since it is not core to the educational business, as long as they get a minimum rent.

Maleta of Indecampus has arrived at what he says is the thumb rule of what a student hostel can charge. “A hostel can charge only as much as the annual education fees of the institution,” he says. “That is the sweet spot and parents are not comfortable paying beyond that.” So, if it is an expensive private university, the hostel can charge accordingly and offer facilities like air conditioning. For cheaper government colleges, hostels have to cater to a more price-sensitive market. Still, facilities like Wi-Fi, food, housekeeping and security are the bare minimum that one expects. Indecampus’s basic pack for its Dehradun hostel will be Rs 110,000 per student per year, including food. 

Despite this being an unorganised market, superior returns of this asset class has attracted investor interest

The need for housing doesn’t stop after education. Young professionals typically end up renting a house with two to four co-workers and face similar problems as paying guests.  

Aarusha, which has provided hostels to students, also has a product for working professionals in the cities that it operates. Vejella says while the business model works for young IT professionals or BPO employees, for blue-collar workers, some subsidy is required. The hostel chain has had to shut down one hostel for blue-collar workers in Chakan, an industrial cluster north of Pune, due to layoffs in the auto component companies located there. He is waiting for the fine print of the central government’s proposal of issuing rent vouchers to the urban poor to see if this becomes a viable business proposition again.

For now, Aarusha has around 4,300 beds across 20 hostels in Pune, Bengaluru, Chennai and Hyderabad, where it is headquartered. It has raised money from several investors, including the non-profit global venture fund Acumen as well as debt from Caspian Advisors and HDFC Ltd. Indecampus, on the other hand, is bootstrapped.

Nikhil Sikri, co-founder of Zolo Stays, that provides 3,000 beds on rent in Bengaluru, Pune and Kota to working professionals and students, describes this as a panic market and explains why the aggregator model doesn’t work here. Zolo Stays, founded in 2016, charges Rs 6,000 to Rs 8,000 a month from its clients, the same as Aarusha homes, which is around 30 percent more than the rent rates in the area since it also provides housekeeping and other services. “A new worker panics if he cannot find a house in a new city. So he signs with us for say two months and then thinks, ‘Why should I pay 30 percent extra?’ Therefore, search and discovery cannot be our only selling proposition. We have to manage residences and that is the real value addition that operators like us bring,” he says.

To work around this problem, Zolo Stays, backed by Nexus Venture Partners, has taken buildings on lease in Pune and Bengaluru. Here, the customer has to sign an 11-month lease which includes the price of services like food (optional), Wi-Fi and housekeeping. It is in effect like renting a house except that the customer does not have to find other tenants to fill the house.

Zolo Stays and Aarusha both take entire buildings or blocks of buildings on rent before they set up hostels as it helps them amortise costs better. The model doesn’t work when you take just a few rooms on rent.

Ultimately, it is the superior returns of this asset class that has attracted investor interest. Most players agree that returns average 14-15 percent after all costs are taken care of. This compares favourably with office space where the rental yields in India are just 7-9 percent. Also, since this is as much a hospitality business, as it is a real estate business, investors need not put in high costs in acquiring property. “We are touching 20 percent margin after all costs,” says Vejella.

With these returns, it’s not hard to see why this is a market waiting to be tapped.