Co-working spaces struggle to find business model
In the past few months several co-working spaces have shut shop in National Capital Region (NCR), Mumbai, Pune and Bengaluru. Rationale behind it is that landlords who have either leased their spaces or have undergone a joint venture with co-working companies felt that the return on interest (ROI) they were generating was not equal to the prevailing market rate and hence have discontinued the lease agreements.
Co-working centres of Regus, Awfis, InstaOffice, 91springboard, NewBridge Business Centre, etc have closed down in the past few months in different parts of India, according to multiple sources.
“The landlord in our Sector 125, Noida center was demanding a high fixed rent, even more than the prevailing market rate, which we thought was unfair to our members. Since we could not reach to a mutual financial term, we decided to close down,” said Varun Chawla, co-founder, 91springboard.
All other companies while agreeing that ‘some’ centres have certainly closed down, maintained that their branches have not suffered, it is the rest of the players in the market that have seen the rationalisation.
Co-working spaces in India operates on different types of business models: sub-lease model where a co-working company lease a space from landlord and sub-lease it to tenants, revenue-share model where landlord carries out the initial investment on the fit-out and in return becomes a business partner and finally the traditional own-and-lease model.
Apart from a few builders who are venturing into co-working spaces, majority of the co-working companies are operating on the first two models.
“One of the major reasons why landlords started leasing their spaces to co-working companies was that they felt that they can generate higher ROI with such shared spaces in comparison to leasing directly to corporate/companies during the time of slowdown,” said Mukul Pasricha, founder, Spring House.
However, not many have been able to meet these expectations. On the other hand, commercial market is on the rise with demand overshadowing supply, which means better returns. Hence, landlords in some cases are discontinuing their rent-agreements with such spaces and are leasing it directly to corporate/companies.
Another reason behind shutting down of spaces is low occupancy. While most of the co-working companies claim that they maintain above 70-80% occupancy in all their centres, the ground reality is completely different. “Only certain centres in CBD areas of top metro cities or those taken-up by corporate witness a steady high occupancy, while in all others start-ups, entrepreneurs and freelancers have taken-up larger share, which is a highly volatile client-base,” said Umeash Sahhaaii, chairman and CEO, Entrepreneur Facilitation Centre (EFC).
To add to this, according to a recent NASSCOM report, only over 1,000 new-start-ups came up in India, far lower than the 2014-15 mark of over 4,000.
“In some cases, co-working companies have given false promises of higher returns, which they eventually failed to maintain,” says Sahhaaii.
Puneet Chandra, co-founder, Skootr however feels that the sub-lease model can still work if co-working companies carry out due-diligence on the location where they are leasing the space and the tenants they are subleasing it to. For instance, leasing a space in DLF Cyber City, Gurgaon can be profitable if the tenants are corporate or SMEs who can afford the rent but if such a space is leased out to start-ups who have low-budget, the space is meant to be doomed, he adds.
Of the three models, most believe that revenue-share model is most viable. “This model reduces the burden of initial investment from co-working companies and makes landlord a business partner,” says Amit Oberoi, National Director, Colliers International India.