Mumbai: The concept of ‘co-working’ is a global phenomenon, stated Jones Lang LaSalle global report. It has further indicated that globally there would be one million members (with seat requirements ranging from one to maybe 200-300) who would register with shared space providers.
It is estimated that India has today anywhere between 15 and 20 lakh seating capacity (operational) and there is so much in this space that this figure would be 50 lakh seats by the end of 2018. With all the client acceptance and research-body certification, optimism rose and so did funding for the industry. Adding to it was the minimal entry barriers, allowing players from established industry houses to real estate developers (using vacant inventory) to specific players with good business practices – all putting in money.
Industry observers are talking of 1,200 players being in the space worldwide and within this India has around 300 players. This high figure (proportion of total players worldwide) is in itself an indication of the optimism which has pervaded the space all through the 2016-2017period. An analyst estimates that just Awfis and WeWorks account for 45-50 per cent capacity.
- With this context, it is logical that most of the players today would be at the lower end, operating from 1-2 cities.
- Typical service levels would vary sharply, as is usual wherever the unorganised segment is active
- In this scenario, pricing power would have been minimal throughout the year. It is likely that a good many would be operating on marginal cost or below.
- Client dissatisfaction would be on the rise, and would have pervaded throughout the customer universe.
- In this scenario, even players with good business practices would find it hard to manage expectations and retain pricing power.
This would hurt the players with long-term vision who would find their break-even point getting pushed further for reasons beyond their control. This would also mean under-appreciation of asset quality in general and even questioning of models like WeWork, who aims to be the high-end service quality standard as of date, after a couple of iterations in its strategy.
Analysts say that perhaps this space is suffering from the same lack of differentiation. Then what emerges is the probability of too much investment generating too little revenue. If one were to look at sheer warm-shell-to-operational-seat investment, it is at a bare minimum of Rs 5,000 across all service categories and types of cities. That means an investment of Rs 200 crore is generating around Rs 200 crore revenue on the 15 lakh seats (80 per cent utilisation rate) and this, when 50 lakh seats get onstream, would go to Rs 500 crore. This may seem impressive, but the industry still has payback equations badly out of whack. And this does not include the basic rental. As Vikas Lakhani of Instaoffice puts it, in traditional leasing, rent risk and capital risk was with the tenant and most co-working operators have just taken the same onto their balance sheets, despite offering a better risk-sharing value to any landlord.
Instaoffice, from inception, has had a very strong cost-control approach which has served the company well and somewhat embodies the current mindset of the industry. The new focus areas are not location, capacity onstream and client acquisition. Now it is about expectation management in the context of positive unit economics – landlords focus on their yield, clients on the service quality and experience, and vendors on sustainability of their contracts. In short, value for money is being recognised as the key metric. Cash flow must improve with limited extra investment.
Part of the problem is that, as many have said before, the Indian market is a different animal. This is starkly because of real estate scenario where, for nearly a decade, yield returns on investment were never a factor in investor purchases. With prices dropping since two years, some sense has returned but then rental yields will stiffen. Landlord interest and operator interests must align and not conflict. The concept of smart cities, which players like Awfis are bullish on, take care of volumes but by nature would drive realisations down.
Given therefore that things are expected to get worse before they get better, how can the industry respond? Supplementary services would be a focus area – limited upfront cost, better client satisfaction and hopefully enhanced revenues. Isharespace is clear that these are critical for industry as a whole and as founders Priyanka Krishnan and Aayush Maheshwari say, sometimes revenue increase is not important. A company would typically make money out of services like car parking and letting out meeting rooms to non-members. But when they facilitate accounts and financial service tie-ups for members, or good offers from restaurants and so on, the entire benefit is passed on. Isharespace estimates 30 per cent rise in revenue without investment.
Other solutions would be consolidation through takeovers, something which Amit Ramani of Awfis is not sanguine about. His view – service and investment standards are too variant for outright takeover of any space. It may be better to create an office, if the location is right. Instaoffice has anyway focused largely on agreements where landlords get improved yields as capacity utilisations go up. Like the IT industry, client diversification is beneficial to the point of necessity. One good thing is that the business model is recognised as absolutely relevant and demand can only go up. Whether even today’s large players will prosper, remains the question.
Journey of Shared Workspaces
|1995: A predecessor of coworking space, C-base, was set up in Berlin, Germany|
|1999: A space with flexible desks, established by a software company, opened in New York, US|
|2002: A community centre for entrepreneurs was founded in Vienna, Austria|
|2005: The first hub was set up in London, UK|
|2006: Citizen Space, one of the first official coworking spaces, was founded in San Francisco, US|
|2007: The number of coworking spaces globally reached 75; the concept of coworking was picked up by the media|
|2008: The Coworking Visa programme, catering to travelling workers, was founded in the US|
|2009: The first official coworking space Betahaus, now home to 200 entrepreneurs, was opened in Germany|
|2010: 600 coworking spaces worldwide|
|2011: The movement nearly doubled every year|
|2012: Open Coworking, an organisation promoting cooperation between coworking spaces around the world, was formed|
|2013: More than 1 lakh people were estimated to be using coworking spaces worldwide|
|2015: By the end of the year the number of coworking spaces globally was predicted to reach 7,800|
Source: JLL report