We noticed the mushrooming of co-working spaces in the Klang Valley over the past 1-2 years. Growing popularity of co-working spaces presents a symbiotic avenue for REITs whereby the former (i.e. operator) gets discounted rent and the latter enjoys take up certainty and new exposure to the smaller tenant segment. The emergence of co-working has also been positive for neighbourhood malls in terms of occupancy and footfall. Given the office oversupply in Klang Valley, co-working also presents on opportunity for developers to lease out their unsold inventory rather than leaving it idle.

What is co-working? Over the past 1-2 years, we noticed the mushrooming of co working spaces within the Klang Valley. To get a better understanding of the co working industry, we recently met up with WeWork and Common Ground. Although co-working is actually a 40-year old industry, it has rebranded itself to become a fast growing style of workspace that involves a shared work environment, powered by technology and adds a lifestyle element above what a traditional office setting offers. The co-working business model involves the operator leasing a space from the landlord (i.e. asset owner), before “chopping” it into smaller segments and subleasing it to multiple other tenants (i.e. members). Co-working space offers a 2-pronged proposition of (i) cost savings which can go up to 25% and (ii) a lifestyle element.

Industry snapshot. The size of the co-working space industry is estimated at USD2.5bn globally (Asia Pacific: >USD350m). At 2% of global grade-A office inventory, this is expected to grow to 30% by 2030. There are an estimated 120 co working spaces in Malaysia but only 24 are in a large scale format (>200k sqft). A report by Colliers has identified 5 factors driving growth in co-working space which are growth in start-ups, increased usage by MNCs, lease accounting changes, technology and higher proportion of millennial workforce.

A possible symbiosis. On one hand co-working space competes against traditional office REITs but on the other hand, they are a potential tenant. Herein lies potential for a symbiotic relationship to exist. As co-working operators usually lease a large chunk of space, REITs may be compelled to offer a discounted rate. In return, REITs will benefit from take up rate certainty by signing on 1 large tenant vs multiple fragmented ones. Furthermore, we believe co-working operators can cast a wider net to capture a larger tenant base. The membership base of co-working space is pretty diverse ranging from MNCs to small start-ups and freelancers. By leasing its space to co working operators, this indirectly allows REITs to capture the smaller tenant segment which was previously not within reach. Within our coverage, MQREIT (BUY, TP: RM1.23) is leasing out its office assets (45k sq ft at Platinum Sentral) to an operator.

Positive for malls. Apart from offices, co-working spaces have also opened in neighbourhood malls such as Glo (WORQ), Citta Mall (Common Ground), Jaya One (Common Ground), Ultropolis (Co-labs) and The Starling (Co-labs). The Malaysia Shopping Malls Association mentioned that this has had a positive impact on malls in terms of occupancy and footfall.

Some reprieve for developers. Given the current office oversupply situation in the Klang Valley, the growing popularity of co-working spaces presents an opportunity for property developers to lease their unsold office inventory as a temporary solution to earn rental income as opposed to leaving them idle. Aside that, for developers with investment properties, a symbiotic relationship can happen with co-working spaces, similar to our argument for REITs. Still, these contributions will only play out meaningfully in the longer term when the co-working industry matures. Within our coverage, most developers are exposed to residential rather than commercial.

Source: Hong Leong Investment Bank Research - 22 Mar 2019