SEA’s co-working operators fight for survival amid COVID-19 outbreak

KMC Frabelle 18th floor coworking area. Photo from company website.

After rapid growth over the last few years, flexible workplace players in Southeast Asia are now embracing their biggest challenge amid restrictions on activity to mitigate the spread of the coronavirus. The almost universal lockdown in urban centres across the region has brought business to a halt and is threatening workspace operators’ ability to stay in business.

The largest players have revised their revenue targets down, and startups in the space are bracing for the worst as rental rebates and early termination of leases become the order of the day. Industry insiders told DealStreetAsia that the sector is set for a wave of consolidation, as smaller players with cash flow issues may have to wind up as their small and medium enterprises (SMEs) customers teeter on the brink of default in the coming months.

“The short-term impact of COVID-19 is that deals will slow right down, especially as governments restrict the movement of people. Some operators will fold, but most will ride the wave as they have clients who are obliged to pay rent,” a spokesman for the United Kingdom-based independent flexible workspace services provider Instant Group told DealStreetAsia.

The research house, which covers more than 12,000 flexible workspace centres across the world, highlighted that when operators lose their SME members – the ones most at risk of defaulting – many operator locations will not be sustainable in the short term.

“We will potentially see closures for smaller, or those with fewer corporates, spaces first. But all is dependent on what rent relief will be put into place,” it added.

According to the Instant Group, some regional co-working operators are seeing a high volume of month-to-month clients terminating their agreements, as well as those clients with maturity dates in the near future.

Some operators in Southeast Asia were offering rent reductions of 15 per cent to 50 per cent to tenants even while starting communication with landlords and waiting on government support updates.

The key challenge for operators now is to right-size their businesses in order to get through the current storm, then re-capitalise once life returns to a new normal. In such a situation, the players with healthy cash flow and cash reserves will have an advantage.

Cash crunch and consolidation ahead

Southeast Asian co-working players interviewed by DealStreetAsia noted that, as governments across the region implement unprecedented lockdown on activity, a cash crunch is imminent, leading to industry consolidation on the horizon.

“There are around 40 multi-location operators in the Philippines. We expect a few of them to be in a cash crunch. We’re actively in talks with 3 operators now around different partnership models including mergers and acquisitions (M&As),” said Philippines’s largest flexible workspace provider KMC Solutions founder Michael McCullough. He also highlighted that it will be pertinent to see if members are able to make their payments on time.

As the virus has spread across regions, some companies have also had to put off launches at new locations. KMC, for one, has had to postpone plans to open new workspaces. The operator, which is backed by the ASEAN Industrial Growth Fund (a vehicle jointly managed by Malaysia’s CIMB Group and Japan’s Mitsubishi Corporation), has also lowered its revenue growth target for the year to around 20 per cent to 25 per cent growth, from 30 per cent initially.

In McCullough’s view, the events and practices that brought communities together have been on hold because of the coronavirus outbreak, and he expects a lot to go virtual going forward. The need to work-from-home now will also be bad for business, as some companies may not be too eager to return to the office.

Timothy Tiah, co-founder of Colony, an upmarket co-working space in Malaysia, did not rule out the possibility of some operators closing in the next six months.

Tiah acknowledged that Colony, backed by family offices including Oak Drive Ventures and Cornerstone Partners Group, has seen an impact on its co-working business since February. Like other premium flexible operators, one third of the group’s revenue comes from events.

“Our February group profit was only half of our January profit. March accounts are not in yet, but we expect if this situation goes on, we might dip into a loss in the coming months,” said Tiah.

Further, as operators offer rental rebates in a bid to hold on to clients, a price war is set to erupt.

“In many coworking spaces, startups make up a large proportion of tenants. As funding for startups dries up, a number of them will likely have to default on their rentals. When this happens, many co-working spaces will, in the short run, cut prices even more to try to fill up and reduce cash burn,” Tiah said. He added that even big operators will have to shut down some locations as they become unprofitable.

DealStreetAsia understands that Justco, the largest co-working space player in Singapore, is offering up to 30 per cent rental rebate to some of its clients.

In Indonesia, the largest co-working operator CoHive also needs to temporarily close some of its centres as the government implements sweeping social restrictions within the Jakarta area from April 10 to 24.

Meanwhile, Vietnamese co-working space providers UPGen and Toong have embarked on business continuity planning measures, which includes implementing split-site operations across its locations to reduce risk, as well as adjusting their rental policies with clients and owners of the properties they operate in.

“Social quarantine is restricting our movement, some of our new construction projects are being held up,” said Toong’s founder Duong Do.

Fighting for the longer-term

Some players are confident that the demand for flexible space will continue to grow once the dust settles and business activity resumes.

“Companies and their workforce need options. They will not be looking to purchase assets; they will be looking for the flexible solutions their employees are demanding,” CoHive’s founder and CEO Jason Lee told DealStreetAsia.

“After the pandemic, many corporations would realise that they function well even remotely. They would embrace a distributed workplace model, where employees can work closer from their home. As companies’ mindsets change, this becomes a great opportunity for coworking spaces to widen their potential members,” Lee added.

Brandon Chia, Vice President & Head of JustCo Singapore and Indonesia, seconds this view. “To some extent, given the situation and how it impacts the way people work, it has probably shed some light on how businesses can rethink working arrangements as part of their longer-term future-proofing strategy.”

Meanwhile, KMC Solution wants to capitalise on the low interest-rate environment and is looking to tap into the debt market to continue its expansion plans.

“All projects are still a go, though launch dates will be adjusted, depending upon how long the quarantine period may last,” said KMC Solution’s McCullough, adding that the management is already looking ahead to 2021 with sites confirmed and agreements being finalised with landlords.

Given the low cost of debt, the group prefers to tap its $20 million project financing lines, over opening its equity pool to new investors. KMC Solution, which has 79,000sqm with over 19,000 members in mainly Metro-Manila as well as Clark, Iloilo and Cebu, aims to have more than 100,000 square metres (sqm) by year-end.

Toong, backed by Openasia Group and Indochina Capital, is also looking for M&A opportunities and is in talks with potential investors and funds to double its network from 20,000 sqm currently.

“Many co-working operators who do not have scale, unproven business models, are becoming distressed during this crisis,” said Duong Do.

But the short-term pain is actually good for the industry, as it could bring back unit economics, and prices that are artificially low now may rise after consolidation.

“This presents sustainable players the opportunity to consolidate the fragmented market,” said Duong.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.