Megatrend for 2025 and Beyond: Part 3, Flexible Workspaces
Before we understand why it is a megatrend, let’s understand the sector in detail.
Value Chain:
By understanding the complete value chain, we will understand how this sector works.
• First comes the landlords: They are the property owners.
• Then come the operators: They take properties on lease, set up the necessary infrastructure such as furniture, fittings, pantry, internet connection, and so on. Basically, they turn a property into office space and manage it.
• Then come the tenants: These include freelancers, startups, MSMEs, or even large enterprises who take office space on rent.
• Then come consultants and brokers: They help tenants find suitable operators according to their needs and help operators get clients.
Our focus is going to be mainly on operators.
Operators Provide the Following Models to Tenants:
Managed Offices:
Here, corporates take an entire property or part of a property as office space. It is fully furnished and serviced by the operator.
Tenants pay a monthly fee based on the number of seats or the area occupied.
This is mainly suitable for large enterprises due to their large office space requirements.
Coworking:
This model is a membership-based, social working environment that includes hot/dedicated desks and private offices. Here, multiple startups, corporates, freelancers, and MSMEs work together in a single office, usually separated by partitions.
In both models, operators don’t just provide office space to work. They also offer other amenities like:
• Dedicated spaces and services for hosting meetings
• IT support
• Reception and administrative services
• On-site cafes or catering services
• Lounges and break areas
• Gyms, yoga studios, and other facilities for promoting employee well-being and enhancing the work environment
Everything is managed by operators.
Now the Question Is: How Do Operators Make Money?
Basically, they take properties on lease from landlords, set up the necessary infrastructure, and rent it out as office space. The difference between the rent received and the rent paid is the revenue of operators.
Operators work with landlords mainly on these two models:
1.
Straight Lease Model:
Here, landlords lease the space to operators for a fixed rent with standard terms and conditions, including a minimum lock-in period.
Operators bear the entire cost of fitting out the properties.
As occupancy improves, operators get massive operating leverage because rent costs remain fixed, but revenue keeps increasing.
2.
Managed Aggregation Model:
Here, operators and landlords share both the risks and rewards. Both share the cost of fitting out the properties. Operators share part of the revenue or profit with the landlords as rent.
This way, the risk for operators is minimized because, during periods of low revenue and profit, the rent they have to pay is also low. However, they don’t get operating leverage because rent increases as revenue and profit increase.
Why Do Businesses Prefer Flexible Workspaces Over Traditional Leasing or Owning Properties?
1.
Reduced Setup Time and Effort:
Businesses can avoid the lengthy and complex process of setting up traditional office spaces, including finding a location, negotiating leases, designing layouts, procuring furniture, and installing IT infrastructure.
It is hassle-free: Businesses don’t have to pay electricity or internet bills, and they don’t need to fix a broken wheel on a chair. Basically, they don’t have to manage the office; they can just come and work. By eliminating the burden of office setup and management, businesses can focus their time and resources on their core activities.
2.
Flexibility and Scalability:
Businesses can easily scale their workspace up or down based on their changing needs without long-term commitments. For example:
Suppose you’re a startup with 10 employees. You’re growing fast and expect to have 50 employees in a few months. You can simply ask the operator for more seats. If growth slows, you might want to reduce headcount. So, you can ask the operator to reduce the seats. This flexibility and scalability are not available if you own a property.
3.
Cost-Effective:
Businesses don’t own the property or set up the infrastructure; they only pay for the seats they occupy. Hence, they save the upfront capex required for owning property or setting up infrastructure.
Growth triggers:
1.
Rapid Growth in Startups:
In India, startups grew at a CAGR of a massive 68% from 2019 to 2023. They are expected to grow further due to the rising aspirations of Indians, driven by programs like Shark Tank, and the availability of capital facilitated by government grants and a maturing VC ecosystem.
Startups prefer flexible workspaces due to their scalability, cost-effectiveness, faster go-live timelines, and the networking opportunities they offer.
2.
Increasing Global Capability Centers (GCCs):
More and more multinational companies are coming to India and setting up global capability centers due to India’s favorable demographics, the availability of quality tech talent, and the cost advantages the country offers.
GCCs prefer flexible workspaces because these allow them to establish a presence in new cities or countries without committing to long-term leases. This is particularly beneficial when testing new markets or setting up temporary project teams.
3.
Shift from Capex to Opex:
To own a property, a large capex is required. Even if you take a property on lease in a traditional way, you have to incur the capex for design, fit-outs, and setting up infrastructure.
Enterprises are moving to the opex model offered by flexible workspaces, where they pay a fixed monthly fee. This helps them with financial planning and cost control.
4.
Emergence of Tier-2 Cities:
Companies are expanding beyond major cities and opening offices in tier-2 cities like Ahmedabad, Jaipur, Kochi, Lucknow, and Chandigarh.
The reasons are, improved connectivity due to nationwide infrastructure developments, affordable office rentals, and the ample availability of skilled workforce.
Flexible workspace operators are reducing the time and cost for these companies by offering ready-to-use workspaces in these locations.
Let’s talk numbers:
• The number of companies with over 10% of their office portfolio being flexible workspaces is expected to jump from 42% in Q1 2024 to 58% by 2026, according to a survey by CBRE South Asia.
• The sector has more than doubled from 29.3 million sq. ft. in 2019 to 61 million sq. ft. in 2023, making India the fastest-growing flex workspace market globally. It is estimated to grow to 126 million sq. ft. at a 15% CAGR.
• In 2023, the flexible workspace market was valued at USD 3.5 billion. It is expected to reach USD 9 billion by 2028, with a CAGR of 21%, according to a report by Avendus Capital.
• As of Q1 2024, the share of flex spaces jumped to 7.4% of the total leasing market in India, up from 3.1% in 2018. This share is further expected to rise to 9.5% by FY26, according to Nuvama.
Companies to Watch Out For:
The only problem in this sector is that the investable universe is very small within the listed space. There are only three listed companies. Here they are:
1. EFC:
• They have a total seating capacity of over 50,000, and the area under management is around 2.4 million square feet across eight cities in India.
• The average rent per seat is ₹6,250.
• They operate on a straight lease model and get massive operating leverage due to higher occupancy rates.
• They have consistently maintained an average occupancy rate of 90%.
• In 85–90% of cases, they ask the landlord to provide a furnished space.
• They are becoming a completely integrated company by doing everything in-house, such as owning properties through the REIT, providing interior design and fit-out solutions, manufacturing furniture for in-house use and external sales, and offering flexible workspaces. The only reliance they have is on brokers and consultants for clients.
In H1 FY25, they achieved:
• Revenue of around ₹275 crore
• EBITDA of ₹133 crore
• PAT of ₹53 crore
Flexible workspaces contributed 54% to the Revenue, while the rest came from design and build solutions.
Management guidance:
• Add 25,000–30,000 seats every year and reach 120,000 seats by FY27.
• They are expected to generate revenue of ₹1,700 crore by FY27:
• ₹900 crore from flexible workspaces
• ₹500 crore from design and build solutions
• ₹300 crore from furniture manufacturing
I had analyzed EFC a few months ago. You can find the full analysis on my profile.
2. AWFIS Space Solutions:
• They have a total seating capacity of 150,000+ seats (including operational, under fit-out, and LOIs) and an area under management of 7.6 million square feet across 224 centers.
• They operate on a managed aggregation model, which protects them from low occupancy risk. As of September 2024, 67% of seats were under this model.
• Their blended exit month occupancy rate is 73%. For centers operational for more than 12 months, the occupancy rate is 84%.
In H1 FY25, they achieved:
• Revenue of ₹550 crore
• EBITDA of ₹179 crore
• PAT of ₹17 crore (excluding exceptional items)
• Co-working and allied services contributed 75% to the revenue, Construction and Fit-Out Projects 23%, and Other 2%.
Management guidance:
• More than double seating capacity from FY24 levels of 95,000.
• Add area under management at a CAGR of 33% by FY27.
3. Kontor Space:
• They have a total seating capacity of approximately 1,200 across four locations as of FY24.
• They operate on a straight lease model, where they lease properties from landlords and then sublease them to clients. They bear the entire cost of setting up infrastructure.
• They are also exploring the managed aggregation model, which might help reduce their costs.
• Their capex per seat is ₹80,000–90,000, much higher than the ₹50,000 of EFC.
• Their revenue per seat is ₹10,000–15,000.
• Their occupancy rate is around 85%.
In H1 FY25, they achieved:
• Revenue of ₹7.92 crore
• EBITDA of ₹2.61 crore
• PAT of ₹1.45 crore
Management guidance:
• Reach 10,000 seats by FY26.
• Keep doubling revenue by FY26.
My Take:
If you ask me, I like EFC because they are becoming an integrated player. This will help them better control their costs and quality.
Risks:
1.
Asset-Liability Mismatch Risk:
If a company takes out a property on lease and doesn’t get any clients for a longer period, they will still have to pay rent to the landlord but will receive nothing as they don’t have a client. This is called asset-liability mismatch risk. However, companies might minimize this risk by negotiating a rent-free period with landlords for the initial months.
2.
Economic Downturn:
If an economic downturn occurs, multinational companies may start leaving India, and startups wouldn’t thrive. Growth will slow down for the sector.
Let me know whether you’ll be investing in this megatrend or not!
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