Sharing Economy

Covid-19 puts co-working business model to the test

Office sharing in the time of Covid-19 sounds impossible, but Hong Kong coworking space provider The Executive Centre sees light at the end of the tunnel even as competitors flail.

Until now, there have been very few speed bumps on the coworking industry’s road to expansion, paying homage to the idea that sharing is caring. Between 2013 and 2017, space dedicated to flexible workplaces in Asia averaged 50% year-on-year growth according to a report by American real estate group CBRE.

With coronavirus pandemic forcing workers to practice social distancing while companies adapt work from home contingency plans, a new normal surfaces emerges for the immediate future.   

“This Covid event is our fifth economic recession,” remarked Paul Salnikow, the founder and chief executive of The Executive Centre, an operator for upscale office and co-working space across 32 cities in 14 Asian Pacific and Middle East Countries, speaking to FinanceAsia. 

The company’s footprint has been steadily expanding over the years with an average growth rate of 20%.

“I think [the 20% growth] this year will be a challenge,” Salnikow acknowledged, but he still expects to see an increase in annual revenue. “Last year our revenue was $235 million while targeting $270 million” for this year, representing a 15% increase. 

The bulk of the company’s revenue comes from renting out private office spaces, providing flexible work schedules during unpredictable times. Multinational corporations are a sure bet and Salnikow estimates that large groups, including Apple, HSBC, Morgan Stanley, Alibaba and Tencent, make up around 76% of The Executive Centre’s client base.

The Executive Centre competes in the premium office rental market alongside Regus, Soho House and the Work Project in Hong Kong. 

Particularly during a pandemic when uncertainty is palpable,“cash is king,” Salnikow noted. “Profitability and liquidity are absolutely back in fashion.”

The WeWork Experience

But times of crisis separate the wheat from the chaff. The pandemic has proven too much for New York-headquartered coworking startup WeWork, which reported another round of layoffs this month. 

The ailing startup is more vulnerable to sudden fluctuations in the economy as it predominantly targets freelancers. Only 29% of clients are large enterprises according to a CBInsights report.

“The idea that you could build a company for years while it was loss-making is a really recent idea and the Covid-19 pandemic has put an end to that,” Salnikow said.

“The Executive Centre's EBITDA last year was $46 million. Today we are forecasting the ability to generate an EBITDA of $50 million or more in 2020.”Salnikow is looking to double the company’s EBITDA to $100 million in the next four years, ahead of a “liquidity event” - most likely an initial public offering. 

However, WeWork’s failed IPO bid in 2019 cast a pall over the workspace rental business model, but there have been past successes. In 2016, Regus - now known as IWG - listed on the LSE and plans surfaced last fall of listing an American spin-off business in New York.

Rolling with the punches

The pandemic battered Chinese coworking space businesses in the first two months of the year, and The Executive Centre was no exception. “On the 10th of February 90% of [Chinese] Executive Centre offices were sold, and people were paying for them, but only 5% of the people actually showed up,” Salnikow said.

“Three weeks later attendance was up into the low 80s and by mid-March attendance was well over 90%.”

While not quite business as usual, The Executive Centre is far ahead of competitors like WeWork, which reported vacancies up to 78% in its Chinese offices even before the pandemic according to media reports.

The Executive Centre experienced a glut in tenants after the 2008 recession as corporates looked to save cash and duck long term lease commitments. “When people want to preserve their cash, they’re looking for every way to hold onto it,” Salnikow said. 

The Executive Centre’s longevity is no fluke. “The [company] itself is tremendously resilient in part because it has always operated from a highly segmented setup in each one of our 135 centres,” Salnikow explained.

Regional adaptability is crucial, given the diversity of Asia’s coworking market. Average desk prices range from a peak of $741 per month in Hong Kong to less than $150 per month in Bangalore, according to a 2019 Colliers report.

“In a field where everyone's selling fundamentally something very similar - flexibility and office space - you have to differentiate,” Salnikow noted. “We differentiate by the strength of our locations and the look and feel of our centres.”

Clients have proven receptive to the group’s attempts to differentiate and lease office space for an average of 36 months with The Executive Centre, according to Salnikow.


 

¬ Haymarket Media Limited. All rights reserved.