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Covid-19 impact: Co-working companies catering to startups may fade
ETRealty  |  April 7, 2020

Ankit Sharma NEW DELHI

Co-working concept, which started with much fanfare and gained momentum in India since 2014, seems to be on the verge of collapse. With overall economy in doldrums and companies/employees getting into the habit of 'work from home' concept, office space is being considered as an additional overhead cost which not many are willing to invest, atleast for coming two-three quarters.

 

Flexible workspaces with 11.2 million sq ft garnered 18% share in total leasing in 2019, according to Colliers International India. Experts feel the unwillingness of corporate to invest in commercial space will have a ripple effect on shared space providers and many are already facing the heat.

 

Co-working companies can be distinctly divided into three business models: lease and sub-lease, revenue share and owned/bought and leased. From customers perspective majority of the co-working companies still cater to startups and SMEs and only a few have corporate as major share of their clientelle.

 

Shared-space providers based on the lease and sub-lease model and who cater to startups are expected to fade if the lockdown is extended for more than a month. Others too are expected to see loss which will run in millions if not more. Not to mention, almost all shared space providers have put their expansion plans on hold.

 

Puneet Chandra, founder and joint managing director, Skootr, a Gurugram-based co-working company said, "Over 50 per cent co-working companies, especially those who have one or two centers, may close down if the lockdown is extended. Companies which were majorly catering to startups or who had very limited funding will burn more cash and may default. Even the acquisition or merger is difficult for such companies as debt would be running high."

 

All 12 centers of Skootr are closed. Chandra too is now in wait-and-watch mode for new expansion plans atleast for next two months. "For us cash-flows are very strong and we can weather out this situation. All our clients are corporate and hence we do not expect much impact on rentals."

 

"Situation is getting from bad to worse and worse part is that this is the time when everyone is obviously on lockdown. Even if the lockdown is, let's say discontinued in the next 15 or 20 days or even a month it's gonna take good two to three months, maybe even six months for the business to revive," said Mukul Pasricha, founder of SpringHouse, a Delhi-based co-working company.

 

The reason, Pasricha says, is because the smaller companies, startups, whom he caters to, work on a very hand-to-mouth situation. They get the money and pay their overhead costs. They do generate profits but it's not, as much as we would like. Now guys like them are going to be looking for other options which is cutting down on costs, like overhead cost and probably working from home.

 

SpringHouse has already received discontinuation mails for 350 out of 3,500 seats, which he expects to go up to 30 per cent. Pasricha grimly adds that he cannot absorb this for more than a month or two.

 

Umeash Sahhaaii, founder, Entrepreneur Facilitation Center (EFC), a Pune-based co-working space provider, says loss are expected to run in millions for everyone as even the corporate are now declining to pay rents. Sahhaaii has closed down all its 15 centers.

 

Sahhaaii too says that startups have already started asking to close terminate their seats. He has already postponed one-two centers which were to be launched in April. "If the government does not support and lockdown is extended beyond April, job losses are also expected to happen," said Sahhaaii. For him, about 60-70 per cent of clients are corporate even then he is expecting major losses.

 

Shesh Rao, co-founder and CEO of BHIVE, a Bengaluru-based co-working space provider says that they will see revenue dip if the lockdown is extended and are not expecting to meet the previous growth/revenue target they had put up for 2020. In september 2019, Rao in an interview with ETRealty had said that they plan to generate Rs 100 crore revenue in the next 1-1.5 years. Now he says the target seems difficult. Company's previous plans to open 7-8 centers in 2020 is now reduced to two.

 

Out of 12 operational centers, Bhive has 4-5 spaces running wherever the clients have speciall permit to work. They have two more centers which are in fit-out mode.

 

"Of the total about 250 companies, about 5 per cent have already said that they plan to close, another 5-8 per cent are postponing their expansion plans or are reducing their existing seats, most are paying full rent as they understand our situation and about 15% have asked for rental waiver which is impossible to give as we too have running cost to cover," added Rao.

 

Even the bigger companies are also looking to cut down on employee strength. "We've already got a lot of emails calls from various founders saying that, lets say, if they had 100 seats now they won't be continuing with the same number but are looking to cut down," said Pasricha, which is the similar situation Sahhaaii finds himself in as well.

 

Renegotiation on rentals on both sides, landlord and client, are expected to happen once the lockdown is over. Rao however says the regenotiations may not happen for existing contracts but the new contract will certainly feel the heat. Pasricha on the other hand is already looking to half his per seat per month rent and cover only the running cost.

 

Even in case of 'force majeure' the contracts are vague and liabilities are not very clear and may lead to litigations if a consensus is not reached between shared-space providers, their customers and landlords.

 

Sahhaaii says, landlords are not willing to give waiver as the government has not given any subsidy on Lease Rental Discounting (LRD). LRD is a term loan offered against rental receipts derived from lease contracts with corporate tenants.

 

Rao says that the co-working industry is urging landlords to waive off or give some discount on rentals. Complete waiver of rentals from our end is out of the question as shared space provider run on very thin margin. "We can only pass-on 15-20% discount even wherever landlords decide to waive off complete rentals. This however is not the case in major technology parks or with bigger builders, no-one is waiving-off rent," added Rao.

 

Sahhaaii says government needs to play a major role if co-working industry is to survive. He gives an example of United Kingdom, where the government is giving interest free loans to companies so that they can get immediate loans and cover their running cost.