China property

China’s co-working operators squeezed by a lack of funding are shutting down

  • Kr Space, one of China’s largest co-working space operators, is cutting staff and scaling back ambitious expansion plans
  • With co-working operators engaging in a bloody price war, profitability remains a distant possibility
PUBLISHED : Tuesday, 22 January, 2019, 9:01am
UPDATED : Tuesday, 22 January, 2019, 7:48pm

A drought in financing from venture capitalists has affected co-working space operators who have been heavily reliant on funding to fuel their rapid expansion and valuation. And amid the funding crunch, even major operators such as Kr Space have found the going tough.

Forty companies in the shared-office sector have vanished in the 10 months from January to October 2018, while about 40 per cent of co-working projects are more than half empty, according to a report by the China Real Estate Chamber of Commerce (CRECC), an information exchange platform for the mainland’s property sector.

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Lack of fresh financing is a matter of life and death for these start-ups, which occupy 3.94 million square metres or 520,000 desks in China’s first-tier cities alone. Besides, no company has ever reported a net profit.

Analysts say that without new funding, co-working start-ups cannot afford to indulge in a price war initiated by deep-pocketed giants such as New York-based WeWork, which commenced operations last year in cities including Beijing, Shanghai, Shenzhen, Guangzhou and Hangzhou.

They added that smaller start-ups will end up either shutting down or being acquired.

Kr Space, one of China’s largest co-working space operators with about 300,000 sq metres of space, said it has become much more cautious in its expansion, giving priority to individual project’s profitability prospects.

The company told the Post that it was cutting overlapping business positions as part of a broader move to reduce operating expenses.

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An executive with the firm who spoke on condition of anonymity, said it had cut 12 per cent of staff. A year-end gala was cancelled and a plan to use another floor in a prime office tower in Beijing as its headquarters was dropped and used for leasing instead.

The company’s headcount now is around 600, but still twice as large as 2018.

This is a sharp contrast from just eight months ago, when Kr Space’s founder Liu Chengcheng said that the company wanted to add 10,000 desks per month in its race to beat WeWork.

In May, Kr Space entered Hong Kong, signing one location in Wan Chai and another later in Time Square - both expensive locations. It also announced plans to enter Beijing and Shanghai’s Grade A offices in core districts, locations that most co-working operators have shunned.

But a long overdue US$200 million funding round has not yet materialised, Kr Space told the Post when asked about it.

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The last injection of US$92 million came in January 2018. Investors in the previous rounds included venture capital firms like IDG Capital and China Minsheng Investment Group.

“The reason co-working operators are in the doldrums is quite simple: they are leasing desks quite cheaply while their office acquisition and operating costs are high,” said Gary Wen, head of commercial department at Savills North China. “They have been telling investors that they can rent out a desk at 4,000 yuan a month but they haven’t been able.”

In Beijing, co-working space in secondary areas ranges between 1,000 to 2,000 yuan per desk per month, going up to between 2,000 yuan to 2,500 yuan in prime districts, according to CRECC.

The conundrum for operators, according to an industry insider, is that if they stick to their prices, then potential tenants will flee to other operators offering cheaper rates, and the lower-than-anticipated occupancy ratio means making losses. If they want to increase the occupancy ratio, then they have to cut prices, which affects profitability.

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Sean Wang, vice-president of Cushman & Wakefield Greater China, said that for co-working space operators rent is a major source of their revenue and they find it difficult to monetise anything else.

“Only those who haven’t expanded recklessly and control costs well will survive.”

But Savills’ Wen feels otherwise. He sees the industry consolidating into a handful of big players.