Even as WeWork’s controversial plans to go public make headlines, south-east Asia’s co-working industry is braced for a slowdown after years of heady expansion as companies struggle to make a profit and investors turn cautious.
The regional shared-office business has ballooned off a low base and been driven by plentiful funding, with the number of new locations growing more than 20 per cent a year over the past three years, according to global workspace firm The Instant Group.
But while some companies plan to keep scaling up, people in the industry say the investment inflows that have boosted this young market are already slowing as the froth comes off.
“The region has enjoyed strong growth in the last couple of years because of the funding activities,” said Sean Lynch, Asia-Pacific managing director at The Instant Group. “Low barriers to entry have allowed many players to enter the market but investors will be more cautious in investing in companies, slightly more risk-averse.” He expects the market to grow 12 per cent this year.
The prospectus for WeWork’s initial public offering has galvanised critics of the co-working business model. They argue that WeWork and others are no more than real estate companies offering services similar to those of IWG, for example, but presented as tech plays. They are vulnerable because of the industry practice of taking long-term leases on properties that are rented out on short-term contracts.
“Global valuations in this space are ridiculous. Investors coming in at these levels are unlikely to make a reasonable return,” said Brahmal Vasudevan, founder of Creador, a private equity company focused on south and south-east Asia.
Funding for co-working businesses in south-east Asia had a banner year in 2018. In January, WeWork opened its first business in the region in Singapore. It has since expanded to five other capital cities. WeWork remains the region’s premium brand — renting space at a WeWork branch in Kuala Lumpur starts at $237 a month, compared with local competitor Common Ground, which charges $95.
SoftBank, which is WeWork’s single biggest investor, is also active in the region’s industry, last year leading a $20m investment in Co-Hive, the largest player in Indonesia. Beijing-based Ucommune, WeWork’s closest global competitor, made undisclosed investments in Indonesian start-ups GoWork and ReWork in 2018, and both companies have since merged and rebranded as Go-Rework.
Collectively, south-east Asia’s homegrown co-working start-ups have raised at least $230m, of which $177m went to Singapore’s JustCo. The company, which has operations across the region’s major cities but also in Melbourne, Seoul, Shanghai, Sydney and Taipei, is the largest regionally, with a valuation of more than $500m and 1.5m square feet of space under management (though it is a tiddler compared with WeWork’s most recent $47bn valuation).
Companies are aggressively expanding. JustCo expects to double its locations this year to 50, across more than 2m sq ft, while Kuala Lumpur-based Common Ground, the second-largest regional company in terms of space under management, also expects to double its number of locations and is considering expanding as far as Australia as early as this year.
But such expansion plans face the challenge of a straitened financing environment. The attention on WeWork, its business model and its lofty mission statement, has generated negative sentiment towards the industry and its valuations, even as global economic growth is turning down.
“Many frame themselves as technology companies when the association isn’t necessarily very clear or strong. Ultimately, these platforms are more dependent on real estate, inventory and increasing the yield per square foot, not on any meaningful or innovative technology offering,” said Justin Hall, a partner at Golden Gate Ventures, a Singapore-based venture capital firm.
The years of plenty for Asia’s technology scene are giving way to caution as risks rise and investors pull back. The value of south-east Asian tech deals fell 28 per cent year on year in the first half of 2019 to just under $6bn, according to Cento Ventures, a Singapore-based technology investment firm.
“The slow economy and young ecosystem have [made it] extremely difficult to raise funds, not just for ourselves, but for other start-ups as well,” said Amarit Charoenphan, chief executive of Hubba, Thailand first homegrown co-working business.
Henry Chin, head of Asia-Pacific research at CBRE Group, said China’s economic slowdown and the US-China trade war had contributed to investor caution, overshadowing any scope for growth in south-east Asia’s co-working market.
“The ease of getting private funds to fuel the expansion is becoming more difficult, and that could potentially slow down the overall expansion,” he said.
The storm breaks
Profitability is also coming into focus. An existing oversupply of new office space presents an affordable option for the target market of small and medium-sized enterprises, threatening the new crop of start-ups which are still marginal players in the region’s real estate market.
Although penetration is low, the new companies have little scope to raise rents or membership fees to drive profits. In 2016, Coma became the first Indonesian co-working company to go out of business. A price war has already started in Malaysia, with new entrants offering free one-month membership to entice tenants. The shake-out is expected to continue.
“There is no doubt that there will be more competition, especially as landlords see they can offer lower pricing. I think there will definitely be some closures,” Juhn Teo, co-founder of Common Ground, told scoutAsia.
— Siew Mung Tan, Malaysia Researcher, FT Confidential Research
scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in east Asia, south Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research