1. Is co-working space a good investment option for institutional players?

Is co-working space a good investment option for institutional players?

The upswing in growth in the co-working space business model with interest from large developers as well as operators has created an investment opportunity for PE/VC investors.

Updated: June 27, 2017 1:29 PM
Real estate developers are now partnering with established operators of coworking spaces through various models to ensure they are a strong player in this space.

By Nitesh Punjabi

India’s growth over the last decade was fueled by large MNCs in technology, BFSI, manufacturing and the IT/ITeS space. However, this new generation has been smitten by the entrepreneurial bug. In the past few years, numerous startups have mushroomed in various sectors. The success stories of Flipkart, Snapdeal, Paytm, to name a few, have inspired more and more people to implement their ideas into successful businesses. The growth of startups has been fueled by the availability of angel and VC funding. However, the funding comes in with various performance milestones and in smaller tranches.

These new ventures run with basic infrastructure and limited number of employees (3-10) and require internet connection, meeting rooms, flexibility in terms of timings, good locations so that it can be accessible to clients, limited overheads and above all an office space with limited commitments. Unlike the larger companies, these firms cannot afford to make commitments for larger spaces, long tenure leases and lock-ins with landlords. Neither do they want to invest in furniture fit-outs / admin staff.

The demand for flexible office space with low overheads and minimal commitments led to the inception of co-working spaces. Co-working spaces as a concept has seen tremendous growth and has not only been catering to its prime clientele of startups but has also found new demand with professionals such as Chartered Accountants, consultants and some large organisations that have been using such spaces as incubation centers and satellite offices. Currently, there are about 160 such operators operating over 350 centers across India in various Tier I and Tier II cities. The focus markets for such operators have been Bengaluru, NCR, Mumbai and Hyderabad.

These centers offer immense flexibility and good service to their occupiers. The memberships range from hourly, daily to monthly memberships. These are typically located in Grade A buildings in CBD / SBD locations. Other than the cost benefits and flexibility, these premises also offer a working environment with great networking opportunities with other co-occupiers. The large real estate developers see this as an additional opportunity. The developers who were used to leasing large office spaces on long term basis to corporates are now softening up to the coworking space trend and want to have a share in this pie.

Real estate developers are now partnering with established operators of coworking spaces through various models to ensure they are a strong player in this space. This also enables developers to build early relationships with tenants who are poised to grow and offer them larger spaces for expansion once the tenant has grown to a larger scale. Developers are offering their space on lease to operators or also on revenue share basis. In some cases, the developers are also offering fit-outs as part of the package to operators or they also bring in investors to fund the fit-outs and focus on yielding returns on warm shell basis.

This upswing in growth in the co-working space business model with interest from large developers as well as operators has created an investment opportunity for PE/VC investors. The initial moves made by developers and operators have established the financial credibility of this model. It is established that this segment is here to grow, but for large operators and developers to make the most of this opportunity, a large amount of investment is needed in this business. Hence, this space has attracted PE /VC attention. This is a classic time to invest in such a business which is currently in growth stage, offers relatively stable cash flows and is scalable to a large extent. For PE/VC investors, the opportunity is multifold – the investment gives them access to a great financial return as well as access to larger startup ecosystem wherein they can find new and enterprising investment opportunities. The PE/VC players have focused on investments with the operators to achieve the scale and growth purely via the co-working space model. Some of the investors who have made investments in this space include PE firm Sequoia India who pumped Rs 130 crore in co-working space provider Awfis and Blume ventures which invested Rs 7 crore (approx.) in Bengaluru-based BHIVE.

With the support of growing ecosystem for startups and demand of flexible office space by small and large corporates and investments from institutional investors, real estate developers and operators, this segment of office space is bound to grow by leaps and bounds into a large business segment in the coming years.

(The author is General Manager, Capital Markets and Investment Services, Colliers International India)

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