Office 4.0: Real Estate MasterclassWhat to do to arrange shared revenue deal with landlord, manage lease cost and risks?

VISHAL GUPTACo-founder and CEO

Brussels, 28th Nov 2016

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PUTTING THINGS INTO PERSPECTIVEIntroduction

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My professional journeyEvolution of my career

Vishal GuptaEntrepreneur | Investor | Ex- Investment Banker | Startups, Technology & Coworking

MISSION: To develop the ecosystem for entrepreneurship and investing in entrepreneurship by breaking barriers to information, access and investment

Investment Banker

Corporate Business leader

Investment Manager, Advisor, Freelancer

2002

2012

2015 Full-time entrepreneur, investor and connector

Hong Kong

London

Property

Renewables

Tech

India

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The journey of CoworkingEvolution of the office market

• >1 million coworkers by 2017• 34% of coworking spaces globally are less than a year old –>

fast growth market• 100 million new businesses are launched annually -> shift

from large corporates to entrepreneur-driven economy• 40% of workforce will be freelancers, independent

contractors or solopreneurs by 2020• >10,000 coworking spaces worldwide -> not a trend, but a

new way of working• $16bln valuation of WeWork has mainstreamed coworking –

> larger companies locating alongside startups

Source: GEM, Deskmag Survey, CoworkingLondon

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Today: The coworking boomHow WeWork has changed the game for everyone

5 mn sq ft

$1.4 bn raised

$16 bn value

Source: Crunchbase, WSJ reports

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Back then: When things went bustHow Regus went bankrupt

• Economic downturn• Over-supply of office space• Fixed long leases in US• Rentals agreed at peak of market• Sharp downturn in passing rents• Reliance on dotcom and startups –

demand fell away

Dot-com bubble burst

1989 – 1st Regus opens in Brussels

1990s – Rapid growth fuelled by startups mushrooming

2000 – Regus IPO

2001 – Expansion across Europe, Americas, Asia

2003 – International business operating in 52countries

2003 – Regus files for Chapter 11 bankruptcy for its US operations, sells stake in UK business

What went wrong?

How they changed?• Corporate restructuring

• Property JVs, profit sharing partnerships with landlords

• Shift to 30-40-30 mix (large corp-SME-startup)

During downturns, the leasing model can make all the difference between survival and failure

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Financing a coworking spaceAverage size of coworking spaces has doubled in 2 years

Need to find new avenues for capital, (also revenues)!

Source: Deskmag Global coworking survey 2016

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WHAT IS OFFICE 4.0?The new model for commercial office and coworking industry

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Office 4.0: It has arrivedCommercial office business is increasingly complex

Office 1.0 Office 2.0 Office 3.0 Office 4.0

Serviced Offices Coworking Serviced Office + Coworking

Ecosystem

Office only Workspace

Community

Workspace

Community

Delivering the above with choice

and at scale

WeWork ModelRegus Model *NEW* Model

Workspace

Lifespace

Community

Design

Resources

Online platformPeripheral locations

Prime locations – Grade A

commercial

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Office 4.0: What it meansOffice is commoditised, new skills required to monetise

For landlords

For everyone

else

Office 4.0 is an entirely different business than owning and

managing buildings

The physical office space is seen as part of the entire value proposition

including a flexible workspace, community, resources and design

elements delivering a whole ecosystem for business, and for life

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What hybrid ecosystems could look like

Incubators

Gestation focus5-15% equity

Discounted servicesEquity-based rent

Accelerators

Investment focus3-10% equity

Structured programmeEquity-based rent

Coworking

Community focusNo equity

Events + networkingCash-based rent

Hybrid Ecosystems

Industry incubator hostIn-house accelerator

Investment fundCoworking spaceCorporate offices

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Office 4.0: Key characteristicsHow it is going to change the industry dynamic

• Emergence of co-working value chain – beyond owner and operator

• Specialization of skills – roles of different players to deliver Office 4.0

• Coworking operators need to transition from “community builders” to “ecosystem managers”

• How is owner-operator relationship evolving• Lease-and-sublease model may not work -> new partnership

models begin to emerge• Response of traditional players • A new class of landlords

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Roles of different players in Office 4.0How the coworking value chain is getting specialised

Traditional players (Office 2.0 & 3.0) NEW (Office 4.0)

Developers

Build spaces(Large floor plates,

natural light)

Landlords

Own spaces(Flexible leases,

engage with operator)

Operators

Build ecosystem(Package and

manage services)

Investors

Growth capital, replace or co-

invest as landlord

Facilitator

Design spacesProvide resources

and expertise

Networker

Generate demand, build community,

business opportunities

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Owner-operator relationshipHow coworking operators provide value to the landlord

Office 2.0 & 3.0 Office 4.0

• Pre-lease• Reduce vacancy rate• Space Incubator• Broaden offering

• Operating contract• Monetise vacant space• Revenue sharing• Joint Venture and

partnerships• Brand value

All of the above provide direct and indirect value accretion to the landlors, and should be considered in the lease negotiation

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Owner-Operator RelationshipSummary of leasing (and revenue) models

Office 2.0 & 3.0 Office 4.0

Conventional lease

Fixed rental/ cost

Revenue share

Variable rental/ cost

Hybrid lease

Floor with upside participation

Joint Venture

Business partner, Equity

for capex

Operating contract

Management fee

Coworking in a Box

Aggregator, demand

generator

Brand licensing

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Response of traditional playersOffice 3.0 is within reach, BUT Office 4.0 is harder to crack

• Traditional players have now awakened to the challenge from new coworking operators

• Developers & Landlords: Embracing coworking to monetise asset portfolio

• MarketTech UK: Coworking campus (Office 3.0) as part of Camden market regeneration, driving footfall to retail sites

• Soho China: Property developer, rolling out a shared office offering across all its sites (Office 2.0 + 3.0)

• Keppel Land Singapore: Launched hybrid serviced office and coworking (Office 3.0) space at prime asset

• Operators: Serviced office (Office 1.0) operators are repositioning their product

• Regus: acquired Spaces to add social coworking (Office 2.0) to its portfolio

Traditional operators moving in to Office 2.0, owners moving in to 3.0, but will find it hard to crack Office 4.0 themselves

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Thinking beyondOffice 4.0 will also see a new class of landlord emerging

• Awareness and interest in coworking business will also attract a new class of landlord with a completely different playbook

• Strata sold owners: Smaller individual landlords owning smaller places may be more inclined to agree to revenue shares and upfront capex

• Angel Investors: HNIs may view this as an asset backed investment with rentals supported by a constituency they understand and believe in

• Tech companies: Tech companies that scale up too quickly may be left saddled with surplus space – with landlord consent, a sub-lease to coworking operator will provide vital cashflow

• Large corporates: Opening up to the idea of monetising their surplus space or outsource entire operations

Proper market diligence and relationship building is needed to orchestrate such opportunities and tailor a mutually beneficial structure

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LEASING CASE STUDYDeveloping a working model

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Case study Analysing trade-offs of different lease structures

• Objective: Develop a simple working model to evaluate financial impact of different lease structures to landlord and operator

• Scenarios: Analyse financial impact in base case and downside scenario with a 5 year horizon

• Inputs required:1. Size of coworking space

2. Market rent landlord can achieve

3. Through-cycle vacancy rates in area

4. Membership capacity as coworking space

5. Average monthly fee per member

6. Anticipated through-cycle occupancy in base case and downside

7. Annual operating cost of running coworking centre

• Analysis: Flex revenue share terms to identify “optimal” arrangement for landlord and operator

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Conventional lease v/s Revenue share [30% model]Landlord perspective

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Conventional lease v/s Revenue share [30% model]Operator perspective

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Conventional lease v/s Hybrid lease [50%+10% model]Landlord perspective

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Conventional lease v/s Hybrid lease [50%+10% model]Operator perspective

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Case study Summary points and takeaways

• In markets/ buildings with high vacancy rates, economics of revenue share should appeal to the landlord

• Revenue share deal requires buy-in to the business model/ easier with track record

• Without revenue share, business model cannot withstand downturn => in the landlord’s interest to avoid contract not being honoured and resulting void period

• Revenue share introduces variability but could provide much higher return to landlord

• Hybrid leases structures contain the variability, while still providing vital operating flexibility to operators

• Revenue share/ hybrid lease structures are more aligned with cahsflows generated from end-occupiers => win-win for landlords and operators

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DISCUSSION CHALLENGEThis or That

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Discussion Challenge

v/sTHIS THAT

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Discussion Challenge

v/s

THIS THAT

Large Integrated

campus

Multiple smaller centres

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Discussion Challenge

v/s

THIS THAT

Commercial building

Industrial building

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Discussion Challenge

v/s

THIS THAT

Private offices

Open Plan

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Discussion Challenge

v/s

THIS THAT

Fixed Lease Revenue share

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Discussion Challenge

v/s

THIS THAT

Management fee

Brand licensing

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Discussion Challenge

v/s

THIS THAT

Parent level financing

Location based

financing

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Discussion Challenge

v/s

THIS THAT

Equity based rent

Cash based rent

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Discussion Challenge

v/s

THIS THAT

Office 2.0 Office 4.0

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WHAT IT TAKES TO SUCCEEDBrainstorming

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What it takes to succeed?Defining your Golden Circle

WHY

HOW

WHAT

1

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What it takes to succeed?Defining your Golden Circle

MY BUSINESSWHY??• XX• X

HOW??• XX• X

WHAT??• XX• X

1

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What it takes to succeed?Standing out from the crowd: Purple Cow

2

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What it takes to succeed?Standing out from the crowd: Purple Cow

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MY BUSINESSNOW – What am I doing differently?• XX• X

FUTURE – What can I do differently??• XX• X

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What it takes to succeed?Where can I turn to for finance:

3White Knight

Friends & Family Angels VC

Venture equity

Venture debt

PE

Banks

Pension Fund

LOC

WarrantsStructured credit

Property JV

Corporate partnership

Overseas capital

M&AHNI

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What it takes to succeed?Where can I turn to for finance:

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MY BUSINESSSources of finance I have considered?• XX• X

Sources of finance I could consider?• XX• X

White Knight

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Contact details

Vishal GuptaCo-founder, CEO

Founder

Tech Startups SocialMedia

London, United Kingdom

www.kabeela.life

vishal@kabeela.life

+44 (0) 7788 491 774

Investment

Fundraising Community

@vishthink

Coworking