Is the coworking space bubble in India about to burst?

While the coworking industry has demonstrated significant growth, they may have bitten off more than they can chew

Published: 26, Feb 2019
Image: Shutterstock
Image: Shutterstock

The coworking industry has changed the shape of the Indian real-estate sector over the past few years. The question is, have co-working brands bitten off more than they can chew?

Coworking spaces today need no introduction. Most people inevitably know at least one person who works at a shared workspace. Simply put, coworking spaces are shared workspaces that house freelancers, startups and corporations alike, in a common space. Members do not have to deal with the burden of expensive and long-term office rental agreements, and commercial property owners get more out of spaces that are lying idle by renting out to coworking players.

The appeal of coworking spaces is apparent. They offer flexible plug-and-play membership options ranging from a day-pass to a yearly lease at competitive rates. Shared amenities such as a pantry, meeting rooms, conference rooms, internet, printing, concierge service and technical assistance are usually part of the package. This makes them extremely cost-effective and operationally convenient. Another important benefit is the collaborative nature of the work space, aiding in building communities and business opportunities for those working there.

India industry overview
Started in West in the late 90s, this trend has caught on like wildfire with over 15,000 coworking spaces in the world today. They have revolutionised the Indian commercial property market with an estimated 400 shared workspaces in the country today, run by around 200 coworking brands. This growth is supported by a rise in the entrepreneurship culture in India over the past few years, giving birth to numerous startups and freelancers looking to house their companies in frugal ways.

Coworking spaces are also a big draw for large companies that are looking to bring cost-efficiencies without compromising on employee convenience or productivity. Contrary to popular belief, coworking space memberships are actually dominated by larger companies, rather than startups, who want to reduce their per-employee cost of business operations.

What does the future hold?
We see three key factors coming into play in the Indian coworking industry in the near future:

Supply will exceed demand
With around 400-odd entrants, the market is saturated with players with different scale of operations. This has resulted in Private Equity backed bigger players such as WeWork and Awfis burning through cash and offering price as a value differentiator. As a result, smaller players are merging with the bigger providers or exiting the market as they simply cannot afford the cash burn.

The future will see increased consolidation among coworking operators. Our prediction is that due to the Mergers and Acquisitions (M&A) action and market exits, the number of coworking spaces may dwindle from its current numbers. Most spaces may cease to operate in the next few years. Smaller players may not be able to alleviate the risk in business models, not having investor backing like bigger players to sustain a competitive environment in the long run. This consolidation among the players at different levels will lead to a lower number of options on the supply side. They will then have to vie for a bigger market share on the basis of quality of services provided.

More action in Tier-2 and Tier-3 cities
With urban and metro centers fast approaching a supply plateau, the action is expected to shift to Tier 2 and Tier 3 cities such as Mohali, Ludhiana, Ahmedabad and Patna. Bengaluru, Mumbai and NCR currently have an estimated 75 percent share of coworking spaces in the country. We expect this number to change in the near future. With incubation centers springing up primarily in Tier-2 and 3 cities, they will be likely to command a bigger chunk of the overall market share in the next few years.

Revenue-share models will not be lucrative
Property owners who leased spaces to companies initially started off with a simple monetisation model such as charging fixed term rent. There was a significant shift in this model owing to the rise in number of coworking success stories and property owners wanting to jump on the coworking bandwagon. Brands setting up coworking spaces are now entering into a revenue sharing model with landlords who earn a percentage of the business revenue generated by these spaces.

While this may have seemed like a lucrative deal to property owners who weren’t able to otherwise rent out their spaces, the challenges of oversupply will soon come into play. With demand not matching the excess supply, revenue sharing models will generate lower returns in face of the vacant seats. We can say that the days of heady growth seem to be reaching their end. In the near future, the capex incurred will not justify the vacant slots and will seem to be a dearer proposition than simple rental based monetisation models. It won’t come as a surprise to see many rental contracts not being renewed with existing coworking operators due to the unviable bottom line scenario for property owners.

While the coworking industry in India has demonstrated significant growth and is here to stay, we can expect to see changes on the supply side. There will be more consolidation of brands based on the survival of the fittest. On the upside, we expect to see better structuring of overall business models that will take the sector to the next phase of sustainable growth.

The author is Founder and Managing Director of SILA.

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