Coworking and the way to Office 4.0

Office 4.0: Real Estate Masterclass What to do to arrange shared revenue deal with landlord, manage lease cost and risks? VISHAL GUPTA Co-‐founder and CEO

Brussels, 28th Nov 2016

PUTTING THINGS INTO PERSPECTIVE IntroducLon

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My professional journey EvoluLon of my career

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Vishal Gupta Entrepreneur | Investor | Ex-‐ Investment Banker | Startups, Technology & Coworking

MISSION: To develop the ecosystem for entrepreneurship and invesDng in entrepreneurship by breaking barriers to informaLon, access and investment

Investment Banker

Corporate Business leader

Investment Manager, Advisor, Freelancer

2002

2012

2015 Full-‐Dme entrepreneur, investor and connector

Hong Kong

London

Property

Renewables

Tech

India

The journey of Coworking EvoluLon of the office market •  >1 million coworkers by 2017

•  34% of coworking spaces globally are less than a year old –> fast growth market

•  100 million new businesses are launched annually -‐> shi\ from large corporates to entrepreneur-‐driven economy

•  40% of workforce will be freelancers, independent contractors or solopreneurs by 2020

•  >10,000 coworking spaces worldwide -‐> not a trend, but a new way of working

•  $16bln valuaLon of WeWork has mainstreamed coworking –> larger companies locaLng alongside startups

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Source: GEM, Deskmag Survey, CoworkingLondon

Today: The coworking boom How WeWork has changed the game for everyone

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5 mn sq Y

$1.4 bn raised

$16 bn value

Source: Crunchbase, WSJ reports

Back then: When things went bust How Regus went bankrupt

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•  Economic downturn •  Over-‐supply of office space •  Fixed long leases in US •  Rentals agreed at peak of market •  Sharp downturn in passing rents •  Reliance on dotcom and startups –

demand fell away

Dot-‐com bubble burst

1989 – 1st Regus opens in Brussels

1990s – Rapid growth fuelled by startups mushrooming

2000 – Regus IPO

2001 – Expansion across Europe, Americas, Asia

2003 – InternaLonal business operaLng in 52countries

2003 – Regus files for Chapter 11 bankruptcy for its US operaDons, sells stake in UK business

What went wrong?

How they changed? •  Corporate restructuring

•  Property JVs, profit sharing partnerships with landlords

•  Shi\ to 30-‐40-‐30 mix (large corp-‐SME-‐startup)

During downturns, the leasing model can make all the difference between survival and failure

Financing a coworking space

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Average size of coworking spaces has doubled in 2 years Need to find new avenues for capital, (also revenues)!

Source: Deskmag Global coworking survey 2016

WHAT IS OFFICE 4.0? The new model for commercial office and coworking industry

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Office 4.0: It has arrived Commercial office business is increasingly complex

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Office 1.0 Office 2.0 Office 3.0 Office 4.0

Serviced Offices Coworking Serviced Office + Coworking

Ecosystem

Office only Workspace

Community

Workspace

Community

Delivering the above with choice

and at scale

WeWork Model Regus Model *NEW* Model

Workspace

Lifespace

Community

Design

Resources

Online plamorm Peripheral locaLons

Prime locaLons – Grade A commercial

Office 4.0: What it means Office is commodiLsed, new skills required to moneLse

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For landlords

For everyone

else

Office 4.0 is an entirely different business than owning and managing

buildings

The physical office space is seen as part of the entire value proposition including

a flexible workspace, community, resources and design elements

delivering a whole ecosystem for business, and for life

What hybrid ecosystems could look like

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Incubators

GestaLon focus 5-‐15% equity

Discounted services Equity-‐based rent

Accelerators

Investment focus 3-‐10% equity

Structured programme Equity-‐based rent

Coworking

Community focus No equity

Events + networking Cash-‐based rent

Hybrid Ecosystems

Industry incubator host In-‐house accelerator Investment fund Coworking space Corporate offices

Office 4.0: Key characterisLcs How it is going to change the industry dynamic •  Emergence of co-‐working value chain – beyond owner and

operator

•  SpecializaLon of skills – roles of different players to deliver Office 4.0

•  Coworking operators need to transiLon from “community builders” to “ecosystem managers”

•  How is owner-‐operator relaLonship evolving

•  Lease-‐and-‐sublease model may not work -‐> new partnership models begin to emerge

•  Response of tradiLonal players

•  A new class of landlords

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Roles of different players in Office 4.0 How the coworking value chain is gesng specialised

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TradiDonal players (Office 2.0 & 3.0) NEW (Office 4.0)

Developers

Build spaces (Large floor plates,

natural light)

Landlords

Own spaces (Flexible leases, engage with operator)

Operators

Build ecosystem (Package and

manage services)

Investors

Growth capital, replace or co-‐

invest as landlord

Facilitator

Design spaces Provide resources and experLse

Networker

Generate demand, build community,

business opportuniLes

Owner-‐operator relaLonship How coworking operators provide value to the landlord

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Office 2.0 & 3.0 Office 4.0

•  Pre-‐lease •  Reduce vacancy rate •  Space Incubator •  Broaden offering

•  OperaLng contract •  MoneLse vacant space •  Revenue sharing •  Joint Venture and partnerships

•  Brand value

All of the above provide direct and indirect value accreLon to the landlors, and should be considered in the lease negoLaLon

Owner-‐Operator RelaLonship Summary of leasing (and revenue) models

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Office 2.0 & 3.0 Office 4.0

ConvenDonal lease

Fixed rental/ cost

Revenue share

Variable rental/ cost

Hybrid lease

Floor with upside parLcipaLon

Joint Venture

Business partner, Equity

for capex

OperaDng contract

Management

fee

Coworking in a Box

Aggregator, demand generator

Brand licensing

Response of tradiLonal players Office 3.0 is within reach, BUT Office 4.0 is harder to crack •  TradiLonal players have now awakened to the challenge from new

coworking operators

•  Developers & Landlords: Embracing coworking to moneLse asset pormolio

•  MarketTech UK: Coworking campus (Office 3.0) as part of Camden market regeneraLon, driving foomall to retail sites

•  Soho China: Property developer, rolling out a shared office offering across all its sites (Office 2.0 + 3.0)

•  Keppel Land Singapore: Launched hybrid serviced office and coworking (Office 3.0) space at prime asset

•  Operators: Serviced office (Office 1.0) operators are reposiLoning their product

•  Regus: acquired Spaces to add social coworking (Office 2.0) to its pormolio

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TradiLonal operators moving in to Office 2.0, owners moving in to 3.0, but will find it hard to crack Office 4.0 themselves

Thinking beyond Office 4.0 will also see a new class of landlord emerging •  Awareness and interest in coworking business will also avract a

new class of landlord with a completely different playbook

•  Strata sold owners: Smaller individual landlords owning smaller places may be more inclined to agree to revenue shares and upfront capex

•  Angel Investors: HNIs may view this as an asset backed investment with rentals supported by a consLtuency they understand and believe in

•  Tech companies: Tech companies that scale up too quickly may be le\ saddled with surplus space – with landlord consent, a sub-‐lease to coworking operator will provide vital cashflow

•  Large corporates: Opening up to the idea of moneLsing their surplus space or outsource enLre operaLons

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Proper market diligence and relaLonship building is needed to orchestrate such opportuniLes and tailor a mutually beneficial structure

LEASING CASE STUDY Developing a working model

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Case study Analysing trade-‐offs of different lease structures •  ObjecDve: Develop a simple working model to evaluate financial impact of different lease structures to landlord and operator

•  Scenarios: Analyse financial impact in base case and downside scenario with a 5 year horizon

•  Inputs required: 1.  Size of coworking space 2.  Market rent landlord can achieve 3.  Through-‐cycle vacancy rates in area 4.  Membership capacity as coworking space 5.  Average monthly fee per member 6.  AnLcipated through-‐cycle occupancy in base case and downside 7.  Annual operaLng cost of running coworking centre

•  Analysis: Flex revenue share terms to idenLfy “opLmal” arrangement for landlord and operator

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ConvenLonal lease v/s Revenue share [30% model] Landlord perspecLve

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ConvenLonal lease v/s Revenue share [30% model] Operator perspecLve

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ConvenLonal lease v/s Hybrid lease [50%+10% model] Landlord perspecLve

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ConvenLonal lease v/s Hybrid lease [50%+10% model] Operator perspecLve

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Case study Summary points and takeaways •  In markets/ buildings with high vacancy rates, economics of revenue share should appeal to the landlord

•  Revenue share deal requires buy-‐in to the business model/ easier with track record

•  Without revenue share, business model cannot withstand downturn => in the landlord’s interest to avoid contract not being honoured and resulLng void period

•  Revenue share introduces variability but could provide much higher return to landlord

•  Hybrid leases structures contain the variability, while sLll providing vital operaLng flexibility to operators

•  Revenue share/ hybrid lease structures are more aligned with cahsflows generated from end-‐occupiers => win-‐win for landlords and operators

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DISCUSSION CHALLENGE This or That

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Discussion Challenge

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v/s THIS THAT


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v/s

THIS THAT

Large Integrated campus

MulLple smaller centres


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v/s

THIS THAT

Commercial building

Industrial building


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v/s

THIS THAT

Private offices

Open Plan


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v/s

THIS THAT

Fixed Lease Revenue share


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v/s

THIS THAT

Management fee

Brand licensing


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v/s

THIS THAT

Parent level financing

LocaLon based

financing


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v/s

THIS THAT

Equity based rent

Cash based rent


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v/s

THIS THAT

Office 2.0 Office 4.0

WHAT IT TAKES TO SUCCEED Brainstorming

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What it takes to succeed? Defining your Golden Circle

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WHY

HOW

WHAT

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What it takes to succeed? Defining your Golden Circle

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MY BUSINESS WHY?? •  XX •  X

HOW?? •  XX •  X

WHAT?? •  XX •  X

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What it takes to succeed? Standing out from the crowd: Purple Cow

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What it takes to succeed? Standing out from the crowd: Purple Cow

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2

MY BUSINESS NOW – What am I doing differently? •  XX •  X

FUTURE – What can I do differently?? •  XX •  X

What it takes to succeed? Where can I turn to for finance:

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3 White Knight

Friends & Family Angels VC

Venture equity

Venture debt

PE

Banks

Pension Fund

LOC

Warrants Structured credit

Property JV

Corporate partnership

Overseas capital

M&A HNI

What it takes to succeed? Where can I turn to for finance:

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3

MY BUSINESS Sources of finance I have considered? •  XX •  X

Sources of finance I could consider? •  XX •  X

White Knight

Contact details

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Vishal Gupta Co-founder, CEO

Founder

Tech Startups SocialMedia

London, United Kingdom

www.kabeela.life

[email protected] +44 (0) 7788 491 774

Investment

Fundraising Community

@vishthink

Coworking