Soho China

Soho China bets big on co-working sector with move into second-tier cities

Commercial property company to establish its 3Q shared office space brand in Hangzhou and Nanjing

PUBLISHED : Monday, 25 September, 2017, 5:46pm
UPDATED : Monday, 25 September, 2017, 10:59pm

Soho China, one of the country’s largest commercial property companies, is taking its co-working space business into second-tier cities, amid fierce competition to take the lead in the burgeoning sector.

Young people in second-tier cities have no major differences from their counterparts in Beijing and Shanghai
Pan Shiyi, chairman, Soho China

The firm is taking advantage of the vast amounts of office and retail space standing idle in second-tier cities, announcing on Monday that it is entering Hangzhou and Nanjing with its 3Q shared office space brand. Until now it has operated 19 centres in Beijing and Shanghai, offering a combined 17,000 seats for clients.

It said it has also earmarked several potential sites in Guangzhou, Shenzhen, Wuhan and Changsha, where it is in talks to launch 3Q.

“Second-tier cities in China are fraught with astonishingly high vacancy ratios, in some cases over 50 per cent,” said chairman Pan Shiyi, who had just finished a month-long reconnaissance trip to Wuhan, Hangzhou and Nanjing. “At the same time, we found huge underlying demand for new-generation offices. Young people in second-tier cities have no major differences from their counterparts in Beijing and Shanghai.”

Soho China is betting big on the increasing popularity of co-working spaces, in which start-ups save money on overheads by sharing a flexible, modern work environment with staff from other companies. It leases whole buildings en bloc at discounted prices, transform them and sublet them to small tenants.

This is a major shift from Soho China’s past strategy of buying and operating offices, as it tries to adopt an “asset-light” business model.

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Some industry insiders already fear the market is crowded, and Soho 3Q faces stiff competition with fast-expanding domestic brands such as UrWork and Krspace, as well as international giant WeWork, headquartered in the US.

The rivalry between WeWork and UrWork – the two dominant players in their domestic markets – recently intensified when the former sued for trademark infringement. UrWork, which operates in 100 centres across 30 Chinese cities – with a combined area of nearly 300,000 square metres – immediately rejected the lawsuit.

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“Shared-office providers are expanding ferociously at any cost, with a top priority of grabbing the biggest market share,” said a JLL report on the market.

A major concern among industry insiders is that, with an average rental yield of less than 3 per cent, providers may find it impossible to make profits once high financing costs, large upfront investment and unstable occupancy rates are factored in. Soho China admits that its financing costs exceed its rental yields.

Still, Pan is sanguine about the sector. He said he is “all-in”, at a time China’s property market is “dangerously frothy” and that he is only focusing on rent as a revenue source. 3Q’s operating centres have an average occupancy of 85 per cent.

“The shared office supply in China is not too big, but too small. It’s meaningless to talk about who is No. 1 for now. There should be hundreds of thousands, even million of seats [in co-working spaces] in China. It would be amazing if just 10 per cent of China’s commercial property stock is converted to shared-office space,” Pan said.

China’s huge stock is a blessing for Soho, for now. Qi Hongbo, chairman of SunnyWorld Group, which leased its Nanjing project to Soho, said many shopping malls were being converted into offices as the city’s retail properties have been struggling.