WeWork aims to cut rental costs through revenue-sharing leases … but can it persuade Hong Kong’s landlords?
- A revenue-sharing agreement would see landlords inject capital or lower their tenant’s upfront payment and in return take a share of the workspace provider’s income
- Some analysts think persuading Hong Kong’s landlords to abandon their fixed monthly rental income will be easier said than done
How do you keep costs down if you want to aggressively expand your business in the world’s most expensive office location?
US co-working space provider WeWork thinks it has the answer. It will try to persuade Hong Kong’s commercial landlords to enter into revenue-sharing arrangements as it takes up new locations.
If it is able to convince landlords to shift away from the conventional fixed-rent model, everyone stands to gain, according to Christian Lee, vice-chairman of WeWork Asia.
“We’ve adopted this scheme in other parts of the region,” said Lee. “Landlords maintain their control over the assets but bring in WeWork to run the building with them. When we talk to the landlords, we let them know that through [this type of] lease, we make more and they make more.”
A revenue-sharing agreement – or “participating lease”, as WeWork has chosen to call it – would see landlords partner with WeWork either by injecting capital or lowering their tenant’s upfront payment and in return, take a share of the workspace provider’s income. WeWork would also help to manage the building, if that formed part of a particular contract.
But some analysts think persuading Hong Kong’s landlords to abandon their favoured fixed monthly rental income in favour of the new business model will be easier said than done.
“Landlords in Hong Kong are quite traditional so why would they put themselves in such a difficult position and share the risks with co-working operators?” said David Ji, head of research and consultancy at Knight Frank.
Office rents in Hong Kong’s prestigious Central district have soared 7.5 per cent in 2018, forcing a number of law firms, finance companies and even investment banks to relocate to cheaper areas such as Wong Chuk Hang and Kowloon East. Commercial rents there are generally between a third and a half what they are in Central.
WeWork has already inked a revenue-sharing agreement with Daman Land in Malaysia, and with global supply chain manager Fung Group, which owns the LiFung Plaza in Shanghai.
The arrangement allowed Fung Group to “maximise the use of our buildings that cater to the changing needs of tenants and utilise the space more effectively,” said Belinda Fung, chairman of Fung Properties China, the real estate arm of Hong Kong-listed Fung Group.
“The strategic partnership allows us to generate greater returns than a traditional leasing model.”
WeWork on Tuesday launched its eighth location in Hong Kong, with more than 1,000 desks spread over 17 floors of LKF Tower in Central.
Next year, it plans to open four more, one in the International Commerce Centre, one in The Quayside in Kowloon, one at Hysan Place and another at Lee Garden One.
Market observers believe a revenue-sharing scheme could provide a buffer zone for co-working operators in Hong Kong if the market turns sour.
“We’ve seen some operators paying a rather aggressively high rent in the past two years in order to gain market share. Now, amid the rising uncertainties, they will be under pressure as rents aren’t expect to increase much because of softening demand,” said Denis Ma, head of research at JLL Hong Kong. “Such a business model could minimise risk through a lower upfront payment and a shared partnership with landlords’ injection of capital investment.”
By the end of this year, co-working operators will have taken up more than 1.8 million square feet of space in Hong Kong, according to some estimates.
However, demand for office space is expected to soften next year amid increasing uncertainty about the city’s economic outlook arising from a slowing mainland China economy and the US-China trade war.
“As economies turn gloomy, everything will be down to cost-saving,” said Knight Frank’s Ji. “Companies will reconsider their office expansion plans.”
Knight Frank expects rent on Hong Kong Island will fall by 1 per cent to 4 per cent next year.
New York-headquartered WeWork opened its first location in Hong Kong, Tower 535 on Jaffe Road in Causeway Bay, in September 2016. It has 69 locations in six cities in mainland China, providing office space for more than 20,000 people, and plans to expand into at least another eight.