Coronavirus to spur consolidation in India’s nascent co-working segment


We look at how the Coronavirus pandemic will affect the growth of the co-working segment, which was projected as one of the bright spots in Indian realty

In spite of the WeWork debacle of 2019, many experts predicted that the co-working segment of Indian real estate, would witness strong growth. In 2019, private estimates pegged the demand for flexible workspace in India to jump five times by 2025, to 130-140 million sq ft, accounting for one-third of global co-working inventory. Similar projections were made, with respect to the growth of user base and operators. From the existing 250 players, the number of co-working operators was expected to more than double by 2025, considering a 10-fold jump in user base numbers by that period.

All these projections were made before the Coronavirus pandemic hit the world in December 2019. In the aftermath of the pandemic, a lot will change for India’s co-working segment, as well. For example, new projects will have to adapt to the sudden changes that the co-working segment in India will undergo, to sustain the deep impact of the virus.

In a recent research report titled, ‘Co-working- Surviving COVID-19’, Knight Frank India says, “Small operators in India will not be able to sustain the catastrophic effects due to their disproportionate exposure to startups and small and medium enterprise tenants that do not have the financial muscle to outlive this crisis”.

Shishir Baijal, chairman and managing director, Knight Frank India, elaborates: “The Indian co-working business, much like other sectors, will feel the impact of the COVID-19 pandemic, with the fringe players likely to make an exit. This will be a period of shake-out for this segment, where we expect larger players with a greater weightage of enterprise tenants, to endure.”

According to Aditya Verma, founder and CEO of The Office Pass, the number of co-working players is likely to drop from 400 to around 150, as a result of this consolidation. At a time when the world has been forced to work from home, global property consultant Cushman and Wakefield also sees the demand for flexible space dropping by 50%-60% y-o-y, in 2020. It also predicts that business disruption for startups and freelancers, will result in small and mid-sized pure co-working players closing facilities.

 

Coronavirus to spur consolidation in India’s nascent co-working segment

 

India’s co-working segment, in numbers

Number of operators

250

 

Dominant players

10

 

Total stock in eight key cities

25.45 million sq ft

 

Annual revenue in 2019

USD 470 million

 

Share of co-working in total office supply in 2019

3.4%

 

City with the highest co-working space stock

Bengaluru (7.85 million sq ft till 2019)

 

PE investment in co-working in 2019

USD 110 million

 

Top players

Awfis, GoWork, BHIVE, Workspace, 91springboard, Indiqube, Innov8

 

Source: Knight Frank Research

 

Co-working in India: The past

The first co-working operation in India was launched in 2013, primarily to cater to the growing number of startups in the country. Although industry projections differ, with respect to the number of co-working operators, the numbers have grown exponentially in a short span of time. Nearly 90% of the players, launched their operations in 2017 or after.

As more young people joined the workforce, demanding flexibility, in terms of timings and location, mainstream companies (Fortune 500, as well as listed enterprises) started to rethink their office space strategies. Co-working spaces became the obvious choice, because it allowed for cost-optimisation. Additionally, businesses did not have to use up their valuable time on space planning and operational challenges.

While the annual space taken up by co-working players nearly quadrupled since 2017, to a little over eight million sq ft in 2019, gross revenues of the business more than doubled to USD 470 million in the same period, shows Knight Frank data.

The top eight cities of India contained an estimated 25.45 million sq ft of co-working stock at the end of 2019, making up for 3.4% of the total office stock. In the US, the share is much lower at 1.5%-2%. Also, nearly USD 110 million of private equity investments were made in co-working businesses in 2019, showing a growth of over 71% y-o-y.

This phenomenal growth gave experts reason to predict that the employee base in India, using the co-working model on a regular base, was expected to grow five-fold over the course of the next five years.

See also: COVID-19 impact on commercial real estate spaces in India

 

Impact of COVID-19 on co-working spaces in India

With the COVID-19 outbreak, a large number of operators are predicted to go out of business and even the most competent players are likely to be impacted severely, before they spring back to a certain level of normalcy in the mid-to-long term.

Approximately 25%, or 6.4 million sq ft of the total 25.45 million sq ft of co-working stock in the top eight cities, is operated by small players. Knight Frank India estimates that at least half of this stock, amounting to 3.2 million sq ft, will be vacated by their operators within 2020, as these small operators fade away.

According to Verma, who launched The Office Pass that runs various co-working facilities across the national capital region (NCR), the pandemic would have an unprecedented business impact across industries and geographies, including the co-working industry. “This impact is likely to be more severe than the DotCom debacle of 2000, the Q3 2008 Lehman Brothers crisis, or the demonetisation in India in November 2016. All businesses will be hit, without exception,” he says. The decisions taken by the management of co-working companies during this period and their previous experience in navigating through the above-stated uncertain periods, will define the extent of damage and their speed of recovery, he maintains.

“One will see consolidation in the industry over the next 12-24 months. Single or limited-location operators are likely to get merged with more established players that are well-funded or are already profitable,” says Verma.

See also: How Coronavirus could change office interior designs in 2020

 

The future of co-working spaces in India

Despite the short-term disruptions, sector stakeholders are optimistic that the co-working segment will see better days, once a cure is found to the deadly virus that has killed nearly 30,000 people in India, till July 23, 2020.

According to projections by Knight Frank, while the industry is expected to see significant exit of startup tenants and smaller occupiers, as they cut costs during the crisis, the demand from large enterprises is expected to grow over the medium to long-term. “The increasing need for flexibility and the competitive advantage of being a workspace expert, will sustain the industry over the long term,” it says.

According to Verma, players that followed a capital-light model and were ‘unit economic positive’, are likely to emerge stronger, while players that were chasing valuation would find it difficult to survive.

“Although the immediate fallout of tenant exits and revenue disruptions will be challenging, a renewed focus on tenant safety and the still attractive premise of flexibility, especially in the light of the current economic uncertainty, should ensure the sustenance and growth of the co-working industry in the long-term,” Baijal adds.

“Once the pandemic is over, more businesses are likely to approve of flexible working arrangements, which would include shifting away from traditional office spaces to co-working spaces. As long as hygiene practices and health precautions are enforced, co-working spaces provide an alternative for businesses in need of a substitute workspace that may prove useful,” says Manas Mehrotra, chairman, 315Work Avenue.

As social distancing becomes crucial, the space per seat could go up to 100 sq ft from this current 65-70 sq ft.

 

Co-working spaces: Key projections for the future

  • Nearly 80% of operators may see closure.
  • 15%-20% likely reduction in costs per seat.
  • Operators to look at revenue-sharing models with landlords.
  • Amid consolidation, builders are likely to add co-working brands to their portfolios.
  • Health, hygiene and advanced tech support to take centre-stage.
  • Workplaces to be built on the six-ft rule, amid focus on de-densification.
  • Demand from large enterprises is expected to grow over the medium to long-term.
  • Demand from MSMEs and start-up tenants to reduce.
  • Landlords to demand shorter tenures.
  • Customised co-working offices to allow occupiers to select the amenities and pay only for those.

 

FAQs

What is the size of co-working space in India?

India is the second-largest market for flexible workspaces in the Asia-Pacific region after China, with over 1,000 co-working spaces.

How many co-working operators are there in India?

While estimates on this differ, there are currently over 250 co-working players in the Indian market.

How much space do co-working models take?

Presently, co-working offices offer around 60-75 sq ft per desk.

 

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