11 July 2018 14:51:37 IST

Co-working spaces: A young but growing segment

As the residential sector flounders, realty players can benefit from the flexible office formats

Commercial real estate in India has witnessed a steady demand in recent times, even as the residential space flounders. The emergence of start-ups, in particular, has led to a number of companies looking for office space. However, it is not economical for small outfits to rent large areas. High fixed capital requirement and lack of flexibility with long-term leases have dissuaded fledgling companies from opting for prime space.

Co-working spaces — a concept that is still in its nascent stage but slowly gaining traction — offer just the solution for start-ups, SMEs and self-employed individuals.

Emerging trend

A co-working space essentially comprises independent and unconnected businesses. It is generally a shared working environment that provides space for freelancers working from home, start-ups and small businesses.

In Western markets such as the US and the UK, co-working spaces are well established. According to a recent Knight Frank report, there are 18,900 co-working centres globally in 2018 — a huge increase from the mere 600 centres in 2010. The market has grown at an average of 54 per cent a year, offering 1.7 million seats, from 21,000 seats in 2010.

The key factor driving this growth is the strong demand from corporates looking to cut costs and network efficiently.

Initially, such spaces found favour with start-ups. But now, even established organisations welcome this work environment. For instance, according to a JLL report, in Amsterdam, mature companies such as Philips and IBM use co-working spaces to encourage innovation. In India, the surge in start-ups and SMEs is one of the main factors contributing to demand.

In addition, the growing need for flexibility to customise, to collaborate, and foster a shared work area culture pushes larger corporates to explore this territory too. The freedom to expand the space as and when required also fuels demand. Companies can begin with dedicated desks or private offices, and can expand to occupy one or more floors, or even an entire building, when required. This ease of creating a work station and the hassle-free set-up are driving the popularity of these spaces.

The Knight Frank report states that currently, big corporates account for about half of the occupier base of a particular co-working services provider. On an average, operators have been able to consistently maintain an 80-85 per cent occupancy rate. This depicts the strong underlying demand that this workplace format commands. For now though, only few industries such as professional services, BFSI, and financial services have taken to these flexible offices.

Competitive environment

Office spaces in India have seen a lot of change — from simple workplaces with desks and chairs to bigger spaces with a comfortable environment, automation and recreational activities.

Co-working spaces not only provide affordable office space but also flexibility in terms of rental agreement (such as monthly payment). The cost also varies depending on whether you use a shared desk or want a dedicated one. Given that co-working spaces are just taking root in the country, almost all the players take to aggressive pricing strategies in order to capture a large market share.

The rates for dedicated desks offered by a prominent operator in Bandra Kurla Complex and Andheri in Mumbai, for instance, are 5-15 per cent less than if a company had leased the same space, says a Knight Frank report.

Some established developers such as Embassy and RMZ have forayed into this space either by partnering with a co-working company or by starting their own services. Domestic players such as Awfis, Smartworks and CoWrks are ramping up operations due to stiff competition from foreign operators such as WeWork, according to a Cushman and Wakefield report.

Major players such as Regus, Wework, Cowrks, Awfis and Smartoworks have about 8.5 million square feet of operational space in the country as of this year. Given the market potential, these companies plan to expand by 7 million square feet by 2020.

According to the Knight Frank report, private equity players have been looking to invest in co-working start-ups. In mid-2017, Sequoia Capital invested $20 million in co-working start-up Awfis, which was the first of many companies in this space to introduce a mobile app that enables users to find and book office and meeting spaces on a real-time basis in its centres across the country.

Real estate gain

Several developers, realising the potential of co-working spaces, are either planning or have already started their own co-working offices, or are collaborating with co-working operators. Low entry barriers should help realty players capture this burgeoning market.

Phoenix Mills, a listed player in the commercial real estate space, has given its mall space for setting up co-working offices. With residential space still facing challenges, exploring the co-working sector could help realty players improve their earnings.