China's over-crowded co-working industry turns to services while funding is inadequate

HONG KONG / SHANGHAI (Reuters) – Many ambitious expansion projects have been outsourced to collaborating space operators in China, such as customizing offices for customers, as rising rates of vacancy and tightening of financing slowed their exponential growth in the last two years.

This shift in strategy marks a turning point for the Chinese co-working sector, whose rapid expansion has helped operators such as Ucommune, MyDreamPlus and Kr Space to raise hundreds of millions of dollars.

The combined area of ​​coworking spaces in four leading cities in China has increased by nearly 60% between late 2017 and last October, according to the China Real Estate Industry Chamber of Commerce Industry Association.

However, 40% of coworking centers were empty more than half in October and 40 coworking brands were closed in the first 10 months of 2018, he added.

"Flexible offices have been turned upside down," said Paul Salnikow, global CEO of The Executive Center, who entered China in 2001 and currently operates 45 high-quality flexible work centers in nine Chinese cities.

"Since November, Chinese operators are moving away from the centers to try to return them to the owner. Some people in this group offered us furniture, saying they were trying to raise money. "

A common solution for businesses seems to be diversification into services requiring less capital investment, such as office design and management.

"Our goal this year is" performance management, "" Mao Daqing, founder of Ucommune, one of the largest collaborative space operators in China, told Reuters.

The company hoped to partner with corporate customers and open 30 flexible work centers for them this year, providing design and management services, out of 15 currently, he said. The Ucommune brand centers would add five to ten more to the more than 200 already in place.

WeWork, based in the United States, began providing such services in China last year and also plans to expand its business.

An industry leader who refused to be identified told Reuters that the badet-light model had made it possible to transfer rental costs to customers, thus increasing revenues.

RISK LANDSCAPES

A January study by CBRE real estate consulting firm of Chinese flexible workplace operators revealed that about 68 percent were planning to slow down or stop expanding this year.

However, rising vacancy rates and the departure of business operators could also pose a problem for Chinese office owners, especially in larger cities like Shanghai where co-work is more common than rest of the Asia-Pacific region.

"Operators working collaboratively must go a step further in maintaining mild and timely CAPEX investments in order to remain operational," said Virginia Huang, General Manager, Trading and Advisory Services, CBRE Greater China.

"This means that homeowners also share some of the risks of this industry, not just the operators."

The conditions of the cooperating underwriters are also changing, with the owners bearing more costs and risks.

Stanley Ching, head of Citic Capital's properties, said operators were increasingly seeking development grants and leasing contracts on profit sharing models with homeowners because they were more reluctant to pay. high rents to secure spaces.

LaSalle Investment Management, which leases space to collaborating operators in China, said it was crucial to select the right operators and limit exposure.

"They are not yet immune to the recession, they have not gone through a recession, we do not know who will survive or not," said Elysia Tse, head of research and strategy at LaSalle IM Asia Pacific.

"We will therefore ensure that our portfolio of tenants who work together represents only a small minority portion."

A positive trend for operators working together is the growth in demand from large companies in the context of the larger economic downturn in China.

"While business economics is becoming conservative and they want to reduce office costs, they are turning to a collaborative workspace that offers flexibility," said Mao, from Ucommune.

"Our customers for the office design service have also grown for this reason."