How can Coworking Spaces in India be Profitable?

CBRE Report says the market size of coworking spaces will be 10 million square feet by 2020 in Tier 1 & Tier 2 cities across India up from 1.5 million square feet at the end of 2017.

A lot of articles have already talked about the benefits of coworking spaces for the occupiers, including Flexibility, High Quality Gen-Y Offices with no capex, Opportunities for Networking & Collaboration, Access to Investor community, etc.

But are coworking spaces in India profitable?

Let’s do a basic unit economics calculation.

Let’s talk about the costs first.

(For all calculations, we will assume carpet area, rather than built up area)

The rental rates for commercial spaces in Grade A buildings in Mumbai (Andheri, Kalina, BKC, Lower Parel, Worli, Thane, Vashi) can vary anywhere from Rs. 150- Rs. 300 per sq feet.

Commercial spaces likely follow a pattern of occupancy followed by a vacancy period, which averages out the rentals to a lower rental rate. Thus, a coworking company would be able to negotiate much better rates with a commitment of 7-10+ years.

Would a coworking company have a horizon of 10+ years for a particular space?

It’s NOT an option, but a NECESSITY.

Since coworking is a long-term business with high investments in furnishings, setup & marketing, and thus, higher gestation periods, it makes sense for a coworking company to engage with a space with a minimum of 7-10+ years horizon.

So, let’s assume the rentals at Rs. 100 per sq feet.

Average area in sq feet per person is an important parameter.

Apart from the workspace area involving desks, chairs and meeting room, a swanky coworking space offers a big reception area, event areas, lounge areas, breakout / recreation zones, a fully stocked pantry with seating, a big conference room.

The average area per person varies anywhere from 50 sq feet to 80 sq feet

Consider an average of 60 sq feet per person.

Rental Cost per person = Rental per sq feet * Average area per person

That makes rental cost per person 100*60 = Rs. 6,000 per person per month

Furnishing Costs could vary anywhere between Rs. 1200 to Rs. 2500 per sq feet. Depreciation over a period of 10 years (120 months), gives Rs. 10 to Rs. 20 depreciation per month per sq feet.

Multiply it with 60 sq feet and it gives depreciation cost of Rs. 600 – Rs. 1200 per person per month.

Major marketing channels for coworking spaces would be International Property Consultants / Brokerage Firms, Digital Marketing (SEM, SEO, Google Adwords), Social Media Marketing (FB, Instagram, Linkedin), Events (Coworking spaces often offer free events area for networking events, skill development workshops, open mics, etc which increases the footfalls & visibility of the space), Referrals, Content Marketing & PR (Blogs, articles, interviews, media coverage)

Barring the Events channel, every other channel is a substantial cost to the coworking space.

Add Operational Costs involved in running a coworking space.

Components of operational costs include

– Utilities like Electricity, Maintenance & Repairs, Leased Internet lines, Housekeeping & Pantry Consumables, Basic Stationery, etc

– Salaries of Office Assistants, Housekeeping & Security Staff, Community Managers, Sales Managers, Accounts team etc.

– Other Costs like Compliance & Accounting costs which would be minor overhead for a large space.

Overall Costing per person (fixed) = Rental Costs + Depreciation on Furnishing + Marketing Costs + Operational Costs

= Rs. 6,600 + Marketing Costs + Operational Costs

So, a calculated guess,

Note: We have not accounted for the vacancy costs for coworking spaces. (Lease rental, staff costs, utilities still have to be paid when occupancy is sub-optimal in first few months).

Now let’s talk about the Revenues

The quoted per seat / person price at coworking spaces range from Rs. 8,000 to Rs. 15,000.

However, the large coworking spaces have more focus on enterprise clients rather than startups / freelancers / independent professionals since latter clientele poses a different challenge in terms of cash flows and stability..

( https://inc42.com/datalab/wtf-are-the-financials-of-awfis-91springboard-and-innov8-are-as-swank-as-their-coworking-spaces/ )

The large enterprise clients, taking up 30+ seats in a coworking space certainly make a case for negotiations in rates.

For flexi-seating, the quoted per person price ranges from Rs. 5,000 to Rs. 10,000.

There is a scope to increase the revenues by over-selling the flexi-seats.

The general experience with flexi-seats is that only 60% – 70% of the occupants are working from the space at any given point of time.

For meeting spaces, the quoted pricing varies depending on the size of the meeting room / conference room / events area.

Coworking spaces have a direct competition with hotels for events / trainings / seminars / workshops. Thus, pricing and amenities provided needs to be extremely competitive.

There are companies looking to have a registered / correspondence office address in a Grade-A commercial building OR have a correspondence office in a particular locality.

The physical usage is restricted to meeting room access and business services such as mails handling and calls handling.

Coworking Spaces can not only monetize the real estate they have.

But they can also monetize the community, the people, using their coworking spaces.

Coworking Spaces can have a revenue sharing arrangement with business service providers including CA, CS, Lawyers.

Royalty from cafeteria / canteen / caterers

However, with intense competition in coworking industry coupled with low barriers to entry, it is becoming increasingly difficult to increase the pricing of the services.

Most of the coworking spaces are operating on thin margins even after assuming full occupancy.

Margins go lower when the occupancy goes down below 80%.

Increasing pricing seems to be a tough call.

Moreover, if the coworking market has to grow year-on-year at 15% upwards, it cannot rely only on MNCs, Enterprise Clients, Established Businesses and Funded Startups as their clientele.

There are over 2 crore MSMES in India and 6 crore people employed in service sector MSMEs in urban India. (Source:  Annual Report 2017-18 on https://msme.gov.in)

Not every business will be able to afford coworking spaces with pricing of Rs.8,000 per seat upwards.

Coworking companies will need to create spaces for every budget.

However, coworking spaces should not position them as low-cost spaces, as it might affect their brand negatively. (Remember Tata Nano)

Coworking industry is quite similar to airlines industry.

Both have an asset with a fixed cost (office rentals v/s aircraft lease), a fixed infra designed to serve the purpose, a staff trained to deliver the service.

The key to success in the airlines industry is the asset with fixed costs should not be idle at any given point of time. Airlines ensure that the aircraft is in the air maximum hours a day (that’s when it is making money off the asset) and on the ground minimum hours a day.

In other words, asset utilization is the key.

Coworking companies too need to ensure their asset (office) should be idle for minimum hours a day.

How to achieve this turnover?

Coworking Spaces can achieve a higher asset utilization by creating more spaces serving multiple purposes.

eg:

A conference room to be used as a flexi- seating space when not in use.

Target US process based BPOs for night shift.

An event area can be rented out for closed exhibitions for retail products (bags / watches / shoes / clothing, etc) on Sundays

It is possible to reduce the area provided per person to around 30 to 40 sq feet per person and still provide a comfortable workspace. Reducing the average area will help in reducing the average per seat cost, increasing the profitability.

Despite the challenges in increasing the pricing, one of the ways which can enable coworking companies to command a premium pricing to an extent is Branding & PR.

How?

Coworking Spaces do come with the benefits of networking & collaboration.

The idea is to make the users re-classify the coworking space rental costs from ‘Administrative Costs’ to ‘Administrative + Branding & PR’ Costs.

WeWork, in my opinion, has successfully been able to do it.

However, scaling at a higher pricing may be a challenge for coworking companies.

To summarize, coworking comes with plenty of benefits for users, and is here to stay.

However, coworking spaces will need to adapt to the Indian market for scaling profitably.

– Neelay Jain, founder of MyCuteOffice.com, a marketplace for shared offices and coworking spaces.