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Consolidate & Synergise: The Way Forward For Co-Working In India

With the sudden spurt of co-working operators as well as shared facilities in the major office districts across India’s leading cities, I foresee an inevitable consolidation of players in the field.

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Challenges of the Co-working World
As the currently emerging trend of co-working spaces gradually become mainstream tomorrow, the segment will have to gear up to face a number of challenges ahead. Across the globe, maintaining occupancy levels and diversifying client mix is a challenging task for flexible workspace operators. The segment in India is still at a nascent stage, and many of the current operators may be unlikely to sustain themselves in the long-term, because of their varying risk appetites and lack of optimal scale to sustain costs. 

According to industry analysts, in the next few years, co-working space will firmly establish itself as an emerging new segment in commercial real estate, touching over 20 mn sq.ft by 2020 and continuing to grow aggressively. This financial strain of keeping up with an aggressive pricing strategy and maintaining a sustainable cost structure could potentially be a challenge for maintaining flexible workplace operations in the long run. Consequently, tomorrow’s co-working market is likely to be shared among large, organised players as a result of consolidation among smaller players and steady growth of larger players. 

Sustainability of Business Models

The co-working model is primarily based on the facility operator’s ability to lease office space over a long tenure and sell it to end-users over the short-term. This flexible lease tenure and scale, the key differentiator attracting occupiers to shared workspaces, ironically, is also the key challenge facing operators, because it makes it difficult for operators to predict cash-flows. Since the average co-working occupier tenure can vary from a couple of months to a couple of years, maintaining a solid transactions pipeline becomes very important. Especially for small and unorganised operators, vacancy costs can spell significant business risks as against those in the business of leasing traditional office spaces. 

Co-working spaces in India commonly operate on the sub-lease and the revenue sharing models. In the former, operators typically get into a long-term lease with the landlord/ property owner and sub-lease the space to multiple occupiers. This model carries the risk of negative cash flows for the operator, as explained above, in addition to risks of incurring vacancy costs. The initial capital investment for the fit-outs, etc., are borne by the operator, while the owner earns a fixed rental income from the operator with no share in the profits. Hence, the time gap between the start of the rent payment cycle to the landlord and the lease payment schedule from the occupiers—may affect the risk appetite of small scale, unorganised operators.

In the revenue sharing model, on the other hand, the property owner and the operator enter into a contract, with the former taking the maximum share of initial investments as well as of the business profits. The latter, who are usually small-time co-working operators, takes up the responsibility of managing the operations at thin margins. For growth in profit margins and to avoid business loss, therefore, operators need to outperform their rental costs. 

The success of a co-working facility, however, cannot be measured by occupancy levels alone. The revenue per seat is a more pertinent measure, as occupiers often lower overall tenure prices of their tenants to ensure a steady transactions pipeline and boost occupancy levels. This constant strife to earn more per seat to maintain margins as well as to attract occupiers can quickly burn out small unorganised players without deep pockets or long-term risk appetites. In the long run, consolidation with large, organised players is often the only alternative left.

Market Dynamics and Service Delivery

As stated earlier, not all operators will be able to sustain their businesses, because of their inability to mitigate risks in their business models. The strain of maintaining their aggressive pricing strategies could also lead to compromises on service delivery, resulting in poor customer experience. For a segment that hinges on occupier/employee experience as a USP, such a scenario could prove to be a huge risk. Going ahead, this would be another reason for the consolidation of operators in the market. 

As par for the course, meanwhile, the growth of India’s fledgeling co-working market will continue to attract organised players and investors alike. Of late, large organised entrants have also begun to create an overall shared workplace experience by merging the services of pure-play co-working, serviced offices and business centres into a seamless platform. As a result, for the lack of industry best practices and/or capital funds, I anticipate small-scale players will be eased out of the ballpark. Again, pushing players into consolidating their core strengths to remain relevant in the market.

Consolidation and Synergy: the Way Forward
While the co-working sector in India is definitely here to stay, fuelled by a growing demand for it by end-users, there are expectations of changes on the supply side. One can expect to see a rising trend of co-working brands consolidating their portfolios. As the sector grows more organised in the coming years, I expect to see larger, organised players entering the market and merging with smaller, unorganised players as part of a synergistic and consolidating exercise. Small players, especially, may not have the risk appetite and/or the financial backing to survive the ever-growing competition and complex business models of the future.   

Large global investors with interests in real estate and large real estate developers have been indicating their interest in the sector in recent years. More such investment players, particularly overseas funds, may soon emerge more actively as the sector matures. New funding avenues will likely boost the confidence, improve the financial viability and secure the future profitability of flexible workplace operators in the country. 

On the other hand, creative communities and innovative formats may attract newer tribes of local, experimental players to keep the sector relevant for evolving end-user needs. A creative, synergistic environment like this could help nurture an ever-fluid, collaborative space to drive India’s flexible office space sector forward into the future of work.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Harsh Binani

The author is Co-founder Smartworks

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