Still room for co-working spaces even as WeWork IPO hits the skids, say analysts

Singapore

WEWORK'S stalled initial public offering (IPO) has flagged risks in the co-working sector, though market watchers say there is still room for co-working spaces in Singapore.

Hefty losses at the co-working giant, which failed to impress investors as it sought a listing, could prompt investors and landlords to be more cautious about the co-working segment from hereon.

Credit Suisse was quoted in a Bloomberg report as having said that Singapore's commercial real estate investment trusts (Reits) could feel the impact of dampened demand for co-working spaces amid weaker economic growth.

"Office Reits have mentioned in recent briefings that corporate demand has slowed, while the narrow drivers are tech and co-working," Credit Suisse analysts said.

"There are growing market concerns around the sustainability of co-working demand going forward."

At the same time, analysts note that profitability can vary substantially across operators: IWG has already broken even, and JustGroup is edging closer to profitability.

This being the case, concerns are likely to centre more on the sustainability of WeWork's leases as opposed to significant industry consolidation.

In Singapore, WeWork has the biggest market share of all the flexible workspace operators by net lettable area (NLA) at 22 per cent, or 850,000 square feet, says a report from Colliers International, which also took into account known future supply.

In the second quarter of this year, the co-working operator launched a 60,000 sq ft workspace at 8 Cross St, a 70,000 sq ft operation at Funan and a 95,000 sq ft space at MYP Centre, data from the real estate consultancy showed. In the second quarter of 2021, it is poised to launch a 200,000 sq ft co-working space at 21 Collyer Quay.

It remains to be seen if it will continue to expand globally at breakneck speed, or be forced to hit the brakes, considering that a US$6 billion loan that it had previously secured from banks was said to be contingent on its efforts to raise at least US$3 billion in a successful listing.

WeWork racked up operating losses to the tune of US$1.37 billion for the six months ended June 30. Its Singapore office declined to respond to queries from The Business Times.

Walter Theseira, an associate professor of economics from the Singapore University of Social Sciences, said WeWork's ability to burn cash now appears to be severely curtailed, and that it will have to change its pricing structure and offerings.

Prof Lawrence Loh of the National University of Singapore (NUS) Business School said that WeWork may have bitten off more than it could chew, in that it undertook aggressive expansion overseas requiring huge investments - even as its cash flow was coming in dribs and drabs.

"WeWork needs to customise for its markets ... and come up with a differentiated market strategy."

He said, however, that there was still some value in the business model that gives companies the flexibility to pay for a bit of space without committing to a long-term lease, while enabling them to manage their cash flow.

Savills' executive director for research and consultancy Alan Cheong, noted that this flexibility suits tech companies in particular, as they expand.

"There will be greater demand for flexible space as companies come and go, especially the unicorns," he said.

Prof Loh said WeWork's failed listing attempt will make investors more cautious about WeWork and the co-working sector in general.

Assoc Prof Theseira added that, investors aside, landlords and service providers engaging with co-working companies could also become more wary about terms.

On their part, co-working players themselves may have to adopt a more conservative approach to reduce cash burn, should raising new funding from VCs and other investors prove more challenging, said Christine Li, head of research for Singapore and South-east Asia for Cushman & Wakefield.

This could entail being more selective about expansion or opting for a profit-sharing model with landlords instead of paying rent.

Singapore is seen as one of the most mature markets in Asia for flexible workspace, with 3.7 million sq ft of net lettable area (NLA) of commercial space, Colliers estimates. This has roughly trebled from 1.2 million sq ft in end 2015. The bulk, or 83 per cent, of the 3.7 million sq ft is in the Central Business District (CBD).

This year, Colliers projects the flexible workspace stock in Singapore could expand by 24 per cent, but that growth may ease to 15 per cent next year on the back of a higher base and tight vacancy.

Still, some market watchers say that the fallout for landlords from the co-working segment potentially going sour may not be huge. According to JLL, flexible workspace presently accounts for about 5 per cent of office stock in Singapore.

While the amount of co-working space is a big number in terms of quantum, it is a small proportion of the total commercial market in terms of NLA, noted Savills' Mr Cheong.

"Any downturn in the co-working segment isn't likely to have a huge impact on landlords as they can hold their breath, given their strong balance sheets and constrained future supply," he said.

Ms Li said that some landlords have opted to go with a management-contract model with co-working operators instead of a traditional lease agreement. "This eliminates the risk of the co-working operator defaulting on their lease payment and ensures they will continue operating."

Under a management contract, the landlord receives a percentage of the co-working operator's profit instead of rent.

But the downside is limited in the case of a traditional lease agreement. If there is a default, the landlord can step in to take over the running of the co-working space, perhaps under a new brand name.

Assoc Prof Nitin Pangarkar from the NUS Business School said that as the economy slows, companies may use co-working more instead of committing to renting space.

However, a deep slowdown could cut into demand for co-working, he warned.

Singapore's co-working segment is dominated largely by the top three operators, with WeWork, IWG and JustGroup accounting for 51 per cent of the market.

Conventional landlords too have been joining the fray. CapitaLand and CDL have opted to tie up with co-working outfits such as The Work project and Chinese co-working operator Distrii respectively.

Meanwhile, GuocoLand's upcoming Guoco Midtown project has set aside 15 per cent of NLA for flexible workspace.

Lendlease has chosen to set up its own brand known as csuites in Paya Lebar Quarter, and Frasers Property is partnering with JustCo (along with GIC) to establish co-working spaces across the region.

READ MORE: As WeWork slows down,its biggest competitor IWG says it's thriving