Office 4.0: Real Estate MasterclassWhat to do to arrange shared revenue deal with landlord, manage lease cost and risks?
VISHAL GUPTACo-founder and CEO
Brussels, 28th Nov 2016
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PUTTING THINGS INTO PERSPECTIVEIntroduction
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My professional journeyEvolution of my career
Vishal GuptaEntrepreneur | Investor | Ex- Investment Banker | Startups, Technology & Coworking
MISSION: To develop the ecosystem for entrepreneurship and investing in entrepreneurship by breaking barriers to information, access and investment
Investment Banker
Corporate Business leader
Investment Manager, Advisor, Freelancer
2002
2012
2015 Full-time entrepreneur, investor and connector
Hong Kong
London
Property
Renewables
Tech
India
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The journey of CoworkingEvolution of the office market
• >1 million coworkers by 2017• 34% of coworking spaces globally are less than a year old –>
fast growth market• 100 million new businesses are launched annually -> shift
from large corporates to entrepreneur-driven economy• 40% of workforce will be freelancers, independent
contractors or solopreneurs by 2020• >10,000 coworking spaces worldwide -> not a trend, but a
new way of working• $16bln valuation of WeWork has mainstreamed coworking –
> larger companies locating alongside startups
Source: GEM, Deskmag Survey, CoworkingLondon
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Today: The coworking boomHow WeWork has changed the game for everyone
5 mn sq ft
$1.4 bn raised
$16 bn value
Source: Crunchbase, WSJ reports
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Back then: When things went bustHow Regus went bankrupt
• Economic downturn• Over-supply of office space• Fixed long leases in US• Rentals agreed at peak of market• Sharp downturn in passing rents• Reliance on dotcom and startups –
demand fell away
Dot-com bubble burst
1989 – 1st Regus opens in Brussels
1990s – Rapid growth fuelled by startups mushrooming
2000 – Regus IPO
2001 – Expansion across Europe, Americas, Asia
2003 – International business operating in 52countries
2003 – Regus files for Chapter 11 bankruptcy for its US operations, sells stake in UK business
What went wrong?
How they changed?• Corporate restructuring
• Property JVs, profit sharing partnerships with landlords
• Shift to 30-40-30 mix (large corp-SME-startup)
During downturns, the leasing model can make all the difference between survival and failure
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Financing a coworking spaceAverage size of coworking spaces has doubled in 2 years
Need to find new avenues for capital, (also revenues)!
Source: Deskmag Global coworking survey 2016
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WHAT IS OFFICE 4.0?The new model for commercial office and coworking industry
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Office 4.0: It has arrivedCommercial office business is increasingly complex
Office 1.0 Office 2.0 Office 3.0 Office 4.0
Serviced Offices Coworking Serviced Office + Coworking
Ecosystem
Office only Workspace
Community
Workspace
Community
Delivering the above with choice
and at scale
WeWork ModelRegus Model *NEW* Model
Workspace
Lifespace
Community
Design
Resources
Online platformPeripheral locations
Prime locations – Grade A
commercial
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Office 4.0: What it meansOffice is commoditised, new skills required to monetise
For landlords
For everyone
else
Office 4.0 is an entirely different business than owning and
managing buildings
The physical office space is seen as part of the entire value proposition
including a flexible workspace, community, resources and design
elements delivering a whole ecosystem for business, and for life
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What hybrid ecosystems could look like
Incubators
Gestation focus5-15% equity
Discounted servicesEquity-based rent
Accelerators
Investment focus3-10% equity
Structured programmeEquity-based rent
Coworking
Community focusNo equity
Events + networkingCash-based rent
Hybrid Ecosystems
Industry incubator hostIn-house accelerator
Investment fundCoworking spaceCorporate offices
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Office 4.0: Key characteristicsHow it is going to change the industry dynamic
• Emergence of co-working value chain – beyond owner and operator
• Specialization of skills – roles of different players to deliver Office 4.0
• Coworking operators need to transition from “community builders” to “ecosystem managers”
• How is owner-operator relationship evolving• Lease-and-sublease model may not work -> new partnership
models begin to emerge• Response of traditional players • A new class of landlords
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Roles of different players in Office 4.0How the coworking value chain is getting specialised
Traditional players (Office 2.0 & 3.0) NEW (Office 4.0)
Developers
Build spaces(Large floor plates,
natural light)
Landlords
Own spaces(Flexible leases,
engage with operator)
Operators
Build ecosystem(Package and
manage services)
Investors
Growth capital, replace or co-
invest as landlord
Facilitator
Design spacesProvide resources
and expertise
Networker
Generate demand, build community,
business opportunities
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Owner-operator relationshipHow coworking operators provide value to the landlord
Office 2.0 & 3.0 Office 4.0
• Pre-lease• Reduce vacancy rate• Space Incubator• Broaden offering
• Operating contract• Monetise vacant space• Revenue sharing• Joint Venture and
partnerships• Brand value
All of the above provide direct and indirect value accretion to the landlors, and should be considered in the lease negotiation
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Owner-Operator RelationshipSummary of leasing (and revenue) models
Office 2.0 & 3.0 Office 4.0
Conventional lease
Fixed rental/ cost
Revenue share
Variable rental/ cost
Hybrid lease
Floor with upside participation
Joint Venture
Business partner, Equity
for capex
Operating contract
Management fee
Coworking in a Box
Aggregator, demand
generator
Brand licensing
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Response of traditional playersOffice 3.0 is within reach, BUT Office 4.0 is harder to crack
• Traditional players have now awakened to the challenge from new coworking operators
• Developers & Landlords: Embracing coworking to monetise asset portfolio
• MarketTech UK: Coworking campus (Office 3.0) as part of Camden market regeneration, driving footfall to retail sites
• Soho China: Property developer, rolling out a shared office offering across all its sites (Office 2.0 + 3.0)
• Keppel Land Singapore: Launched hybrid serviced office and coworking (Office 3.0) space at prime asset
• Operators: Serviced office (Office 1.0) operators are repositioning their product
• Regus: acquired Spaces to add social coworking (Office 2.0) to its portfolio
Traditional operators moving in to Office 2.0, owners moving in to 3.0, but will find it hard to crack Office 4.0 themselves
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Thinking beyondOffice 4.0 will also see a new class of landlord emerging
• Awareness and interest in coworking business will also attract a new class of landlord with a completely different playbook
• Strata sold owners: Smaller individual landlords owning smaller places may be more inclined to agree to revenue shares and upfront capex
• Angel Investors: HNIs may view this as an asset backed investment with rentals supported by a constituency they understand and believe in
• Tech companies: Tech companies that scale up too quickly may be left saddled with surplus space – with landlord consent, a sub-lease to coworking operator will provide vital cashflow
• Large corporates: Opening up to the idea of monetising their surplus space or outsource entire operations
Proper market diligence and relationship building is needed to orchestrate such opportunities and tailor a mutually beneficial structure
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LEASING CASE STUDYDeveloping a working model
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Case study Analysing trade-offs of different lease structures
• Objective: Develop a simple working model to evaluate financial impact of different lease structures to landlord and operator
• Scenarios: Analyse financial impact in base case and downside scenario with a 5 year horizon
• Inputs required:1. Size of coworking space
2. Market rent landlord can achieve
3. Through-cycle vacancy rates in area
4. Membership capacity as coworking space
5. Average monthly fee per member
6. Anticipated through-cycle occupancy in base case and downside
7. Annual operating cost of running coworking centre
• Analysis: Flex revenue share terms to identify “optimal” arrangement for landlord and operator
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Conventional lease v/s Revenue share [30% model]Landlord perspective
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Conventional lease v/s Revenue share [30% model]Operator perspective
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Conventional lease v/s Hybrid lease [50%+10% model]Landlord perspective
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Conventional lease v/s Hybrid lease [50%+10% model]Operator perspective
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Case study Summary points and takeaways
• In markets/ buildings with high vacancy rates, economics of revenue share should appeal to the landlord
• Revenue share deal requires buy-in to the business model/ easier with track record
• Without revenue share, business model cannot withstand downturn => in the landlord’s interest to avoid contract not being honoured and resulting void period
• Revenue share introduces variability but could provide much higher return to landlord
• Hybrid leases structures contain the variability, while still providing vital operating flexibility to operators
• Revenue share/ hybrid lease structures are more aligned with cahsflows generated from end-occupiers => win-win for landlords and operators
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DISCUSSION CHALLENGEThis or That
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Discussion Challenge
v/sTHIS THAT
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Discussion Challenge
v/s
THIS THAT
Large Integrated
campus
Multiple smaller centres
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Discussion Challenge
v/s
THIS THAT
Commercial building
Industrial building
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Discussion Challenge
v/s
THIS THAT
Private offices
Open Plan
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Discussion Challenge
v/s
THIS THAT
Fixed Lease Revenue share
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Discussion Challenge
v/s
THIS THAT
Management fee
Brand licensing
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Discussion Challenge
v/s
THIS THAT
Parent level financing
Location based
financing
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Discussion Challenge
v/s
THIS THAT
Equity based rent
Cash based rent
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Discussion Challenge
v/s
THIS THAT
Office 2.0 Office 4.0
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WHAT IT TAKES TO SUCCEEDBrainstorming
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What it takes to succeed?Defining your Golden Circle
WHY
HOW
WHAT
1
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What it takes to succeed?Defining your Golden Circle
MY BUSINESSWHY??• XX• X
HOW??• XX• X
WHAT??• XX• X
1
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What it takes to succeed?Standing out from the crowd: Purple Cow
2
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What it takes to succeed?Standing out from the crowd: Purple Cow
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MY BUSINESSNOW – What am I doing differently?• XX• X
FUTURE – What can I do differently??• XX• X
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What it takes to succeed?Where can I turn to for finance:
3White Knight
Friends & Family Angels VC
Venture equity
Venture debt
PE
Banks
Pension Fund
LOC
WarrantsStructured credit
Property JV
Corporate partnership
Overseas capital
M&AHNI
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What it takes to succeed?Where can I turn to for finance:
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MY BUSINESSSources of finance I have considered?• XX• X
Sources of finance I could consider?• XX• X
White Knight
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Contact details
Vishal GuptaCo-founder, CEO
Founder
Tech Startups SocialMedia
London, United Kingdom
www.kabeela.life
+44 (0) 7788 491 774
Investment
Fundraising Community
@vishthink
Coworking