Investment Banking

Are investors confident about Flex workspaces?

December 2022

Read Time: 4 minutes

The exponential growth witnessed by flex workspaces in India came to a standstill when the pandemic forced organizations to shift to remote working models, leaving investors uncertain about the future of the industry. However, post-pandemic recovery in flex workspaces has been stronger than estimates, making investors sit up and wonder whether it is a short-term phenomenon or is it the next big thing in commercial real estate.

The post-pandemic era made organizations and employees recognize the need for a new work model—a model which would provide employees with flexibility without compromising on collaboration and team bonding. This led large enterprises to adopt the hybrid model through flexible workspaces, work from anywhere policies or a shift to hub-and-spoke models, thus increasing employee satisfaction and reducing rental costs by opting to partner with flex workspaces. As offices started to re-open and businesses embraced the new normal, there was a sense of realization among investors that offices are indispensable—the nature and style of working could change, but physical offices would still exist in a modified form.

The focus in India is shifting towards managed offices, rather than the conventional co-working solutions that are known globally. For enterprises, a flex workspace not only represents the real estate decision but also includes the value-added services which come along with it.

This explains why many large organizations like Microsoft, Amazon, Google, HSBC, Standard Chartered, etc. have leased out flex workspaces. This boost in demand has propelled the flex workspace sector to grow up to 43 mn sq. ft by Q1FY23 from a mere 1.6 mn sq. ft in 2017, commanding ~5% share of the total Grade-A commercial real estate market.

If we analyze the structure of the flex workspace market in India, it is quite fragmented, with over 2,300 centres operated by more than 150 players across the top 9 office markets, dominated by the large operators of scale like WeWork, Smartworks, Awfis, Indiqube, Simpliworks, CoWrks, Tablespace, 91Springboard, among others. Sectors like IT and ITeS and BFSI occupy close to 60% of the total area under flex workspaces in tier I cities like Bangalore, Hyderabad, Mumbai and Delhi NCR.

The pandemic stress tested the strength and sustainability of the business model for all the players, with occupancy levels dipping down to below 40%.

However, the post-pandemic recovery for all the flex workspace operators has been remarkable, with occupancy levels surpassing the pre-pandemic numbers, breaching the 85% mark on the portfolio level for several large operators. This has made the need to raise institutional capital imperative for the established players, which also explains why flex workspace operators like WeWork, Smartworks and Tablespace are in the market to raise growth capital.

Globally, large PE funds like Goldman Sachs, Warburg Pincus, APG, CPPIB, Equity International and more have invested in such businesses, and now India is successfully attracting marquee investors like Keppel Land, Sequoia Capital, Tiger Global, ChrysCapital and Westbridge Capital, while catching the attention of many others.

We expect this trend to continue with more PE investors participating in the growth story of flex workspaces in India.

Investors are of the view that the current sectoral tailwinds are strong enough for this sector to grow exponentially in the next five years and become close to 15% of the entire commercial real estate market in India by FY27.

Most PE funds believe that the flex workspace sector is a high-return investment option in the long run, offering better yields than the conventional commercial real estate market.

The fragmented flex workspace market in India, with the top 8-10 players enjoying ~60% market share, is headed for consolidation. Typically, opening a new centre has a long gestation period of about 9-12 months. To grow fast, the operators would have to look at inorganic growth as the most effective strategy. The next phase of growth could see many small operators being acquired by the larger players, and India witnessing new entrants. Global players are also eyeing an acquisition or entry into the Indian market.

Flex workspaces have established a use case for every organization, irrespective of the nature or size, and have created a huge buzz in the investment world. Given the strong undercurrents of demand and supply, the sector is poised to grow further in the coming years with a big TAM, strong unit economics and excellent returns.

This article was originally published by Mint.

Author: Prateek Jhawar, Managing Director and Head, Infrastructure & Real Assets, Avendus Capital

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