Are Coworking Spaces A Viable Asset Class In Pakistan?

Coworking spaces as we know them today first emerged in the United States around the mid 2000s to deal with the growing demand for shared spaces driven by the rapidly expanding freelance economy and the need for flexible work environments.The first official coworking space, San Francisco Coworking Space, was founded in 2005 by Brad Neuberg. The space provided a collaborative environment, where individuals from the same field could exchange ideas and learn best practices to enhance their products and services. However, the concept goes back further, where hackerspaces like C-base, deemed to be precursors of coworking spaces, were founded as early as 1995 in Berlin. 

The idea of Neuberg made coworking spaces popular across the globe, particularly in developed markets like Europe and North America, where such spaces started springing up to cater to this niche demand. Over the years several coworking spaces have emerged that have transformed into major global players like WeWork, Regus (IWG), and Industrious.

When it comes to Pakistan, the country caught on to the trend a little late. Although international chains like Regus were already operating coworking facilities in the country in 2009, it was the year 2016 when the sphere of coworking spaces started gaining momentum in the country. This was the case due to the inception of a nascent gig economy and fledgling startup ecosystem, both of which were evolving quickly due to the launch of high speed 3G and 4G internet in the country a couple of years ago. During this era several local players emerged onto the scene.

However, an unprecedented upsurge in the establishment of commercial real estate for coworking spaces has been observed post COVID-19, where numerous coworking facilities have mushroomed across the country. But why is that the case, have coworking spaces emerged as a successful model within commercial real estate? In this story, Profit explores the evolution of the coworking space industry and its future trajectory.

Value Proposition of Coworking Spaces

     Coworking spaces provide office space at affordable rates, particularly to small and early stage ventures for whom it is financially infeasible to make a massive upfront investment on infrastructure. This includes lease commitments, administrative overheads, utility payments, maintenance costs, refreshments, printing facilities, security, IT support, and other expenses. These spaces enable companies to scale efficiently in accordance with their budget and plan. Companies can expand or roll back their operations seamlessly, as additional customized space is available on demand and the ownership of company’s fixed assets is minimal. 

 Apart from that, these spaces also provide small companies with a sense of community, where they can expand their network by interacting with a diverse range of companies and individuals, enabling the exchange of ideas, the latest market developments, and new skills. It is very much possible that companies might find investment for their next funding round or discover a lucrative business opportunity from within their coworking space community. Additionally, many coworking spaces host roundtable conferences, workshops, and mentorship programs, which further foster innovation and collaboration.

These spaces are strategically located around major business districts, which allows small companies to enhance their brand value by flaunting a posh business address and makes their prospective client base of companies much more accessible that plays a crucial role in business generation.

Leaders of the Coworking Space Industry

According to estimates, there are around 449 coworking spaces operational across Pakistan. However, there are five major players in the coworking space industry, where Regus is the only international brand, while four local players include Kickstart, Daftarkhwan, COLABS, and the Hive. Three of them, Kickstart, Daftarkhwan, and the HIVE were founded in 2016, while COLABS was founded in 2019. 

Regus, the only international chain of coworking spaces in Pakistan, was founded by Mark Dixon, a Monaco based English billionaire. The company started their operations in the country in 2009 with a single branch at Bahria Complex III, MT Khan Road. 

On the other hand, Kickstart was established by three founders, Saad Riaz, Khawaja Raza, and Hassan Shahid. The three founders struggled to find an affordable and flexible working space, which inspired them to find the coworking space. They funded initial operations of the company through their own capital. Similarly, Daftarkhwan was the brainchild of Saad Idrees and Ahmad Habib who wanted to promote entrepreneurial culture in the country through providing premium coworking spaces. The venture Daftarkhwan is backed by investors such as Dubizzle, Walled City Co, and Dot Edu Ventures. 

The Hive, another major player, was founded by Owais Zaidi, who established the venture to provide customizable and flexible office solutions for businesses of all sizes. Mr. Zaidi bootstrapped the company by starting out from a single location in Islamabad but today the Hive has a footprint across three major cities. Lastly, COLABS was founded by two brothers Omar Shah and Ali Shah. The founders raised capital from VCs like Indus Valley Capital, Zayn Capital, and Fatima Gobi Ventures to redefine the workspace experience for all segments of the corporate sector in Pakistan through COLABS.

All of these major players are present in almost all three major business centers of Pakistan, Karachi, Lahore, and Islamabad, except COLABS which does not have a branch in Islamabad and Daftarkhwan which does not have a facility in Karachi but is present in Rawalpindi instead. If we had to rank these players by number of locations, then at first place would be Regus, which has 12 coworking spaces, Kickstart will grab the second spot with 10 coworking facilities, Daftarkhwan would be third with 9 branches, fourth will be the Hive with 8 spaces and COLABS will be at last spot with 6 locations. 

Since these companies provide premium quality coworking services, they charge higher rents from the rest of the competition. In this segment of premium coworking spaces, the rent for a desk starts from Rs.25,000 per month and goes up to Rs.70,000 per month depending on location and facilities. The total capacity of these coworking spaces range from 4,200 to 5,400 desks, where all of them are operating at an overall occupancy rate of more than 80%, while some at even 97%. 

Evolution of the Customer Base of Coworking Spaces

During the outset of the coworking spaces culture in Pakistan in 2016, the general notion was that the coworking spaces are for startups and freelancers, which were given a boost by the evolving entrepreneurial ecosystem and the surging gig economy. While startups and freelancers did use these spaces, they were not the core customer base. Instead, a new segment, initially not on the radar of the coworking spaces emerged as the star category: service export driven SMEs and back-end offices of foreign companies. The SMEs exported services related to accounting, design, consulting, and IT services, but the majority of them exported IT services. This makes complete sense, as IT services companies generally have small to medium sized teams and stable cash flows, making coworking spaces an ideal choice for their business. No wonder we have witnessed a monumental rise in Pakistan’s IT exports. 

This trend continued until Pakistan was hit by the COVID-19 pandemic, which halted the national economy, but there was a silver lining, it expedited technological innovation and adoption in the country. It provided impetus to the local startup ecosystem, enthralling foreign investors who invested mammoth sums of capital, leading to a startup boom in the country post 2020. 

During the years 2021 and 2022, almost all startups that had raised funding decided to work through coworking spaces. This meant that the concentration of startups in the customer base of coworking spaces increased significantly. This allowed the coworking spaces to thrive and expand as the startups they catered to were growing at a brisk pace. 

Nevertheless, this startup frenzy ended towards the end of 2022, when we saw skyrocketing inflation and huge interest rates spikes in the developed world. It dried up funding for startups particularly in frontier economies like Pakistan, instigating a startup winter that lasts till date. This dry spell for startups has adversely affected coworking spaces to say the least. However, over the past two to three years, the industry has found a new customer segment, large corporations and multinational companies, which have become increasingly interested in its services. Why is it the case?

The world is entering a new global order of multipolarism, characterized by protectionism, as it transitions from a unipolar order dominated by globalization. This has led to an increase in the frequency of black swan events around the globe, as oxymoronic as it may sound, fueling skepticism among countries regarding each other. Hence, large corporations have recalibrated their strategy with regards to capital expenditure, they don’t want to own fixed assets particularly in countries that have precarious economic and political climates. 

However, it’s not just that, corporations across many industries are motivated to minimize their capital expenditure and ownership of fixed assets, particularly the ones which are not involved in producing value for the company directly. This strategy allows companies to shrink costs and focus on core business operations, while remaining agile, where it could scale up or down in any market in case of a disruption.

Business Models of Coworking Spaces

Initially, when the coworking spaces came onto the scene, most of the major operators followed a location based model, where they would pool in capital from multiple investors for establishing a coworking space at a certain location.  These operators would lease property from a landlord using the collective funds and then develop a coworking space on it, where the maintenance, branding, and management were the responsibility of the operator. Since the concept was new and untested, investors demanded high returns from operators, which squeezed margins for operators themselves. The situation exacerbated for the operators during COVID-19, when businesses shut down and many companies terminated their contracts with coworking space operators, however, landlords demanded full rent despite economic slowdown. 

The situation obliged operators to redesign their strategy and come up with a new asset-light model. In this model, coworking space operators identify a strategic location and landlord. Afterwards, they launch a coworking space with the landlord as a joint venture, where the landlord spends his own capital for development of the space but it is managed by the operator. As far as the rents are concerned they are distributed between both the landlord and the operator. This model has proven to be highly successful for coworking space operators as it saves them massive upfront costs and enables them to share risk with the landlord appropriately. Nevertheless, the landlord takes on more risk in this model because he bears all the cost for setting up a coworking space. So what’s the catch? 

Well, the landlords earn a higher rental yield by participating in this model. They are able to split the gains with the operator obtained through managing a coworking space, which would not have been possible through a vanilla rental agreement with the operator or any other lessee. As per the coworking space operators, the average rental yield for a commercial property is 5% but with this model of coworking spaces, landlords can uplift their yields to about 7.5% to 8%. 

Today, most of the operators utilize both models but they prefer the second one. However, there is a third model as well, the franchise model, but it has not been widely adopted by the market, thus far. In this model, operators who have an established brand (franchisor) partner with independent operators (franchisees) in order to expand. The franchisee invests in setting up and running the space, while benefiting from the franchisor’s brand, business model, and support in marketing and operations. In return, it pays franchise fees and royalties to the franchisor. This model enables rapid expansion with lower risk for the franchisor and provides franchisees with a proven framework to attract members and generate revenue. 

Where is the Market Headed?

The coworking space market in Pakistan has gone through multiple highs and lows over the years due to varying economic activity, swaying business models, and concentration of customer base in certain segments such as startups. Nevertheless, major coworking space operators are increasingly inclined towards developing a diversified customer portfolio, including startups, SMEs, freelancers, and large corporations. However, in recent times, operators have been striving tirelessly to onboard large corporations in particular, as they have stable cash flows and large capital reserves, which would provide them recurring revenue and assist them in establishing a truly diversified portfolio.

Apart from that, major operators are also exploring the market for coworking spaces in tier 2 cities like Faisalabad, Multan, Gujranwala, and Peshawar. The demand for coworking spaces and flexible work environments is surging in these cities due to a growing base of businesses and freelancers. Although some local players have emerged in these cities, we are barely scratching the surface.  Expansion into these regions would allow operators to tap into a burgeoning demand for flexible workspaces, while benefiting from lower real estate costs compared to major cities. The growing traction for remote work and hybrid models in these regions, present an opportunity for coworking brands to establish early dominance and cater to local entrepreneurs, business outsourcing firms, and regional corporate offices.

Lastly, one major gap that exists in the market is the absence of a centralized marketplace for coworking spaces. There is a need for a dedicated platform that allows customers to compare different coworking spaces based on pricing plans, locations, and amenities. Such a platform will not only augment the accessibility and visibility of coworking spaces but also enhance decision-making for businesses and individuals. We feel that if such an aggregator for coworking spaces is developed, it would redefine how businesses discover and book office spaces.

The advent of coworking spaces has certainly provided the much needed innovation for commercial real estate in Pakistan, where it has raised rental yields for investors, fostered entrepreneurial culture in the country, and served as a focal point for networking and exchanging groundbreaking ideas. Nevertheless, the major operators in the sphere need to ponder how they could further develop this industry. Here’s a hint: they could consider integrating VR/AR technology into their spaces.

The post Are coworking spaces a viable asset class in Pakistan? appeared first on Profit by Pakistan Today.