Coworking here to stay despite WeWork concerns

Singapore

THE coworking business is here to stay notwithstanding the recent woes of coworking giant WeWork that has forced it to pull the plug on an initial public offering, according to separate reports from Jefferies and DBS.

A Credit Suisse report earlier this week said poor sentiment on the company could further damp demand for coworking spaces amid slowing gross domestic product growth, hurting office Reits in Singapore.

WeWork's troubles may speed up consolidation among operators, but Jefferies analyst Krishna Guha believes the coworking business model remains viable here as traditional tenants embrace a "core plus flexible" concept and smaller firms seek to lower fixed costs and ease business expansion.

More work is done by cross-functional project teams who move to different countries once a project ends, he added.

DBS Equity Research analysts Rachel Tan and Derek Tan said demand from entrepreneurs, free-lancers and startups will support the industry.

An important consideration is the operator of the coworking space and those backed by landlords or developers such as Distrii by City Developments, Justco by Frasers Property and The Work Project by CapitaLand are more resilient, added DBS.

Although Singapore's overall coworking space has tripled since 2015, its total net lettable area (NLA) of 3.7 million square feet (sq ft) make up only about 5 per cent of island-wide office space.

DBS said S-Reits' (Singapore real estate investment trusts) exposure to WeWork is 2 per cent or less in terms of portfolio NLA, except for CapitaLand Commercial Trust (CCT) and Frasers Commercial Trust (FCOT). For example, CapitaLand Mall Trust's exposure is one per cent of its NLA.

CCT has the largest exposure to WeWork at about 4 per cent of total NLA, mainly due to a seven-year lease it signed with WeWork for 21 Collyer Quay commencing Q2 2021.

"In the worse case scenario where WeWork fails to undertake the lease, there is still time for CCT to find alternative tenants as the building sits on a prime location in the central business district," said DBS.

There is also a planned asset enhancement initiative to refurbish the building, DBS added.

Suntec Reit signed a 10-year lease with WeWork in 2018 for 36,500 sq ft of space, which is fully occupied.

The sign-ons for both Reits are below market rate, but have extended fit-out periods and no break clause, noted Mr Guha.

Including a lease in its Perth commercial building, FCOT has the second-largest exposure, with 3 per cent of its NLA leased to WeWork.

Singapore has the second highest number of coworking centres in Asia behind Tokyo. According to DBS estimates, 30 per cent to 90 per cent of net demand for Singapore office space since 2015 has been from coworking operators. This may slow down in the coming years, it reckoned.

The Reits should be able to manage the slowdown as rents expiring in the next couple of years are currently below market rates by more than 10 percentage points, said Jefferies' Mr Guha.

So unless there is a drop in demand and job losses increase sharply, landlords can still keep their office occupancy up by lowering reversions and focusing on tenant retention, he added. "Stable unemployment rate can mitigate negative effects in coworking and lower bond yields can provide valuation support."

"In view of the slowing economy and a mini hike in supply of 1.7 million sq ft in 2020-2021, we believe that there is rising risk of slower than anticipated take-up rates, and potential stagnating of prime office rents, which stands at S$11.30 per square foot as at Q2 2019, up 26 per cent from the lows in Q2 2017," said DBS.

CCT has been the most recep-tive to flexible workspace operators, with an exposure of about 10 per cent compared with less than 5 per cent for other S-Reits.

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