How coworking spaces are overcoming challenges to drive growth in India
Coworking spaces today have become very popular and are seeing an exponential growth in India. In fact, India is the second-largest market for flexible workspaces in APAC, second only to China.
Anup Jain, Managing Partner, Orios Venture Partners, an early-stage VC fund, works out of WeWork, a coworking space, which has office spaces in Bengaluru and Gurugram. “It just makes it simpler. It is a good space, and we also get to work closely with startups,” he says.
Anup adds that it also gives them the opportunity to collaborate, which cannot be found in single office spaces. “And not to mention that startup founders don’t have to worry and keep aside their already limited funds for operational expenses,” he says.
While coworking spaces were initially preferred mostly by smaller companies and startups, today they are also preferred by large and medium-sized businesses for their affordable infrastructure and business opportunities.
The space is also not restricted to larger cities, but tier II cities like Chandigarh, Ahmedabad, Kochi, Indore, and Jaipur too are following the trend. According to YourStory Research, there are over 179 coworking spaces across Tier II and III cities.
As of August this year, coworking spaces raised $96.55 million across four deals. In 2016, the space raised $49.7 million across seven deals.
With India being called the second largest hub for startups globally, the coworking market is also saturated with players with different scale of operations.
Recently, OYO Hotels and Homes acquired Delhi-NCR-based Innov8 for Rs 220 crore, and made its entry into the coworking space.
New-York based WeWork, which is a major coworking player in India, recently filed its much-anticipated IPO prospectus, and rebranded itself as ‘The We Company’.
And it just isn’t just WeWork, CoWrks, Awfis or other larger players like 91Springboard, the Hike, InstaOffice; the space is seeing many new entrants.
According to Neetish Sarda, Founder, Smartworks, the operational challenges faced by most coworking spaces is to optimise the operational cost without compromising service their standards. They also look to standardise service offering across centres to deliver a better experience. This includes minimising turnaround time for resolution of client issues and attrition of blue-collar staff.
“There are significant operational costs (for coworking spaces) like managing people, getting the right mentors, and ensuring there are enough events and sessions around to help people collaborate. There also needs to be a strong team that manages each of the startups. It actually is more operationally intensive than one would assume,” says a real-estate builder from Bengaluru.
It is important for coworking spaces to be able to maintain a minimum occupancy level for most part of the year, and have a plan to expand in a strategic manner across geographies.
“One of the primary risks cited for all coworking players, including the large global players, is that the rental commitment to space owners is long term - over nine years - while the clients who occupy their spaces are generally for short to medium term (one month to three years). This results in capital inefficiency and demand-supply mismatch,” says Amit Ramnani, Co-founder and CEO, Awfis.
According to a JLL global survey, while the number of people opting for coworking space is on the rise, only around 40 percent of all coworking spaces are profitable.
Just four years ago, this number was 32 percent. The survey also states that while typically most coworking spaces take a year to break even, turning profitable is a long journey.
What models work
Sunanda Verma Bhatta, Co-founder, The Daftar, Pune, agrees that the business model of coworking is a little tricky as the operators buy long and sell short, and it is also a capital-intensive business.
“However, it is the case with all the business models having their pie of strengths and weaknesses. The idea is to maximise the strengths, and the best part of the coworking business model is that it is a cash flow-generating business, and hence can be developed as a great profitable business,” she says.
Amit says Awfis operates on a straight lease or managed aggregation model. He says currently only 30 percent of the seats are under straight lease model where they have taken up the property on a rental basis.
“We heavily engage with landlords under our Managed Aggregation Model (MAM). MAM is a unique business model that enables Awfis to partner with space owners of underutilised commercial spaces and strike a ‘no minimum guarantees’ deal - where space owner makes the investment on fit-out infrastructure and builds out a centre,” says Amit.
He explains that Awfis gets to acquire supply in an efficient way, which makes the model risk-averse and asset-light to a large extent. The owners not only get occupancy for their space, but also an opportunity to share the upside of our business.
“This also results in capital efficiency, which helps us to set up four-to-five seats for the same cost that other players use to set up one seat. Currently, 70 percent of our seats are under MAM, and we intend to increase it to 80 percent in the next 10-12 months,” says Amit.
On the other hand, Sudeep Singh, CEO of GoWork, says they don’t consider coworking as a merely infrastructure-based business that entails simply renting out spaces. He says their strategy is to enable coworking in its truest essence.
Explaining the strategy, Sudeep says,
“We are constantly creating more avenues such as introducing mentorship programmes for young professionals to enhance their skillsets, enabling investor relations, and facilitating B2B collaborations within the community to give young businesses what they’re seeking the most. Companies and individuals come to us not just for the amenities but also to benefit from the various programmes we run from time-to-time that help startups expand their network and scale.”
Differential pricing options
While the models may be different, ultimately, it is to ensure they have a wider range of consumers and businesses. Generally, the price per seat per month ranges from Rs 10,000 to Rs 45,000, accommodating smaller startups to larger companies.
Oyo Rooms, which has also ventured into the coworking space market with Oyo Workspaces, is currently looking at three segments - low, mid, and high range.
In total, Oyo Workspaces is looking to immediately open its premises to over 21 centres with over 15,000 seats across 10 cities. The team already claims to have clients like Swiggy, Paytm, Nykaa, OLX, Pepsi, and Lenskart among others.
Companies like Paytm Mall, TVF, CS Direkt, TBO, and Coverfox are currently operating from the GoWork campus. And Awfis has the likes of Syngenta, Dun & Bradstreet, Duff & Phelps, Hinduja Global Services, Vodafone, Reliance, Hitachi, Blazeclan, Zomato, and Practo.
“This is the next phase of the coworking spaces, where everyone understands the value and even larger companies are looking at these for opening smaller offices,” says Anup.
A better option?
Despite these challenges, multiple factors are driving the flex workplace space in India.
One of the reasons being real-estate costs becoming significantly cheaper in this setup, which also enables fractional ownership.
“It is like Uber and Ola. People now can own a small ride and don’t even need to spend lakhs to buy a car,” says Anup.
A JLL, CBRE report says, coworking spaces have disrupted the commercial real estate segment in India with approximately 325-330 coworking operators in the top cities, and the average transaction size increasing from 52,000 per sqft in 2018 to 77,000 per sqft in Q1 of 2019.
Over 13 million people are expected to work out of coworking centres by 2020, with many corporates expected to allocate 10 percent of their office portfolio to agile workspaces.
And this can be attributed to its affordable pricing. For rents starting at Rs 10,000 per seat per month, shared coworking spaces offer several businesses lower utility bills and operational costs, and the advantages of collaboration and learning.
“Shared workspaces have created a transparent relationship with both the landlord as well as the end consumers. They provide unparalleled flexibility and mobility to their users,” adds Amit.
But while the demand is growing, the going is getting tougher. So, what do coworking spaces need to do to stay relevant? With the industry expected to reach a valuation of $2.2 billion by 2022, it sets a strong tone for growth within the sector.
In addition to this, Tier II cities are expected to grow to 8.5 million seats by 2020, and thereby result in further growth for coworking spaces.
In an earlier report, Samantak Das, Chief Economist and Head of Research and REIS, JLL India, said, “While coworking companies took up a modest 0.17 million sqm in 2017, the first quarter of 2018 itself has exceeded the annual tally of 2017 at 0.19 million sqm. The expansion plans of major players and the increasing appetite for this format from occupiers, property owners, and coworking operators should see annual transaction numbers triple from current levels over the next three years.”
What the future holds?
Currently, Awfis has 30,000 seats across 63 centres in nine cities in India, and is looking to reach 2,00,000 seats by 2022. It is also planning to tap Tier II markets like Bhubaneshwar, Kochi, Indore, Jaipur, and Ahmedabad. It claims to be profitable at an entity level since 2018, and plans to release its IPO by 2022.
Elaborating on GoWork’s plan, Sudeep says: “We plan to expand across the country with 50 campuses over the next five years with an immediate focus on Delhi-NCR, Bengaluru, and Mumbai, which have a thriving startup environment. We estimate the coworking industry to grow at a minimum rate of 33-35 percent YoY. Our strategy is to therefore let other players in the industry expand, settle down, and saturate, before we step in and take on the swiftly growing demand.”
India is the world’s youngest startup nation with more than 70 percent founders under the age of 35 years, and for the millennials, workspaces need to enhance creativity, contribute to collaboration and networking, offer flexibility, adopt latest technologies, and yet be affordable.
Rising to the occasion, that is precisely what coworking spaces are offering.
(Edited by Megha Reddy)