Coworking Europe Masterclass - What to do to arrange shared revenue deal with landlord?
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Overview of Office 4.0 - the new model for commercial office and coworking industry. Framing the leasing discussion in Office 4.0 context. Case study example. Discussion topics. Team brainstorming exercises.
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Coworking Europe Masterclass - What to do to arrange shared revenue deal with landlord?
- 1. 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
- 3. Myprofessionaljourney Evolutionofmycareer 2 Vishal Gupta Entrepreneur | Investor | Ex- Investment Banker | Startups, Technology & Coworking MISSION: To develop the ecosystem for entrepreneurship and investing in entrepreneurship by breaking barriers to information, access and investment Investment Banker Corporate Business leader Investment Manager, Advisor, Freelancer 2002 2012 2015 Full-time entrepreneur, investor and connector Hong Kong London Property Renewables Tech India
- 4. ThejourneyofCoworking Evolutionofthe officemarket • >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 -> shift 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 valuation of WeWork has mainstreamed coworking – > larger companies locating alongside startups 3 Source: GEM, Deskmag Survey, CoworkingLondon
- 5. Today:The coworkingboom HowWeWorkhas changedthe gameforeveryone 4 5 mn sq ft $1.4 bn raised $16 bn value Source: Crunchbase, WSJ reports
- 6. Backthen:Whenthingswentbust HowReguswentbankrupt 5 • 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 – International business operating in 52countries 2003 – Regus files for Chapter 11 bankruptcy for its US operations, sells stake in UK business What went wrong? How they changed? • Corporate restructuring • Property JVs, profit sharing partnerships with landlords • Shift to 30-40-30 mix (large corp-SME- startup) During downturns, the leasing model can make all the difference between survival and failure
- 7. Financing a coworking space 6 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
- 8. WHAT IS OFFICE 4.0? The new model for commercial office and coworking industry 7
- 9. Office4.0:It has arrived Commercialofficebusinessis increasinglycomplex 8 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 ModelRegus Model *NEW* Model Workspace Lifespace Community Design Resources Online platform Peripheral locations Prime locations – Grade A commercial
- 10. Office4.0:Whatit means Officeis commoditised,new skillsrequiredtomonetise 9 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
- 11. What hybrid ecosystems could look like 10 Incubators Gestation 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
- 12. Office4.0:Keycharacteristics Howit is goingto changethe industrydynamic • Emergence of co-working value chain – beyond owner and operator • Specialization of skills – roles of different players to deliver Office 4.0 • Coworking operators need to transition from “community builders” to “ecosystem managers” • How is owner-operator relationship evolving • Lease-and-sublease model may not work -> new partnership models begin to emerge • Response of traditional players • A new class of landlords 11
- 13. Rolesof differentplayersin Office4.0 Howthe coworkingvaluechainis gettingspecialised 12 Traditional 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 expertise Networker Generate demand, build community, business opportunities
- 14. Owner-operatorrelationship Howcoworkingoperatorsprovidevalueto the landlord 13 Office 2.0 & 3.0 Office 4.0 • Pre-lease • Reduce vacancy rate • Space Incubator • Broaden offering • Operating contract • Monetise vacant space • Revenue sharing • Joint Venture and partnerships • Brand value All of the above provide direct and indirect value accretion to the landlors, and should be considered in the lease negotiation
- 15. Owner-OperatorRelationship Summaryofleasing(andrevenue)models 14 Office 2.0 & 3.0 Office 4.0 Conventional lease Fixed rental/ cost Revenue share Variable rental/ cost Hybrid lease Floor with upside participation Joint Venture Business partner, Equity for capex Operating contract Management fee Coworking in a Box Aggregator, demand generator Brand licensing
- 16. Responseoftraditionalplayers Office3.0 is withinreach,BUTOffice4.0 is harderto crack • Traditional players have now awakened to the challenge from new coworking operators • Developers & Landlords: Embracing coworking to monetise asset portfolio • MarketTech UK: Coworking campus (Office 3.0) as part of Camden market regeneration, driving footfall 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 repositioning their product • Regus: acquired Spaces to add social coworking (Office 2.0) to its portfolio 15 Traditional operators moving in to Office 2.0, owners moving in to 3.0, but will find it hard to crack Office 4.0 themselves
- 17. Thinkingbeyond Office4.0 willalsoseea newclassoflandlordemerging • Awareness and interest in coworking business will also attract 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 constituency they understand and believe in • Tech companies: Tech companies that scale up too quickly may be left 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 monetising their surplus space or outsource entire operations 16 Proper market diligence and relationship building is needed to orchestrate such opportunities and tailor a mutually beneficial structure
- 18. LEASING CASE STUDY Developing a working model 17
- 19. Casestudy Analysingtrade-offsofdifferentleasestructures • Objective: 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. Anticipated through-cycle occupancy in base case and downside 7. Annual operating cost of running coworking centre • Analysis: Flex revenue share terms to identify “optimal” arrangement for landlord and operator 18
- 24. Casestudy Summarypointsand 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 resulting void period • Revenue share introduces variability but could provide much higher return to landlord • Hybrid leases structures contain the variability, while still providing vital operating flexibility to operators • Revenue share/ hybrid lease structures are more aligned with cahsflows generated from end-occupiers => win-win for landlords and operators 23
- 25. DISCUSSION CHALLENGE This or That 24
- 30. Discussion Challenge 29 v/s THIS THAT Fixed Lease Revenue share
- 32. Discussion Challenge 31 v/s THIS THAT Parent level financing Location based financing
- 33. Discussion Challenge 32 v/s THIS THAT Equity based rent Cash based rent
- 34. Discussion Challenge 33 v/s THIS THAT Office 2.0 Office 4.0
- 35. WHAT IT TAKES TO SUCCEED Brainstorming 34
- 37. Whatittakes to succeed? DefiningyourGoldenCircle 36 MY BUSINESS WHY?? • XX • X HOW?? • XX • X WHAT?? • XX • X 1
- 38. Whatittakes to succeed? Standingoutfromthe crowd:PurpleCow 37 2
- 39. Whatittakes to succeed? Standingoutfromthe crowd:PurpleCow 38 2 MY BUSINESS NOW – What am I doing differently? • XX • X FUTURE – What can I do differently?? • XX • X
- 40. Whatittakes to succeed? WherecanI turn to forfinance: 39 3 White Knight Friends & Family Angels VC Venture equity Venture debt PE Banks Pension Fund LOC WarrantsStructured credit Property JV Corporate partnership Overseas capital M&A HNI
- 41. Whatittakes to succeed? WherecanI turn to forfinance: 40 3 MY BUSINESS Sources of finance I have considered? • XX • X Sources of finance I could consider? • XX • X White Knight
- 42. Contact details 41 Vishal Gupta Co-founder, CEO Founder Tech Startups SocialMedia London, United Kingdom www.kabeela.life vishal@kabeela.life +44 (0) 7788 491 774 Investment Fundraising Community @vishthink Coworking