Failure of the WeWork flotation causing concerns over office space value

By November 14, 2019 offices
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The recent failure of the WeWork flotation that has been making the news of late thanks to the multiple troubles the co-working space has been having is raising fears that the sector could start to see property valuations for London office space to go down. This is despite the huge increase in rents in recent years, in part attributed to the exponential rise of flexible working spaces in the capital.

A boom in co-working spaces in London

The percentage of office space given to co-working businesses in the capital is higher than that of any other city worldwide. The percentage currently stands at 5% of office space in London that is now provided for flexible working purposes, with offices in Camden, Kentish Town, West End and Soho, and virtually every area of London and other main cities in the UK.

Which firm is the largest co-working space in the capital?

The largest private landlord in the City of London outside of the government is the US co-working giant WeWork.  The firm was founded in 2010 with the aim of providing freelancers, contractors, and remote employees affordable and cool workspaces, and managed to double its revenue most years, however, it also was seeing operational losses growing at an exponential rate too. But in recent weeks it has suffered a very dramatic downfall.

For example, the flexible working space firm has seen it agree a rescue package deal recently with Japanese investor Softbank. The Japanese company has effectively seized control from the chief executive Adam Neumnann.

What was the problem that caused WeWork’s decline?

A problem for investors when it came to the co-working firm was that should the UK economy end up going into recession, the business model that the company had chosen meant that its client could simply scale back on space requirements at a fast rate than WeWork could of its long-term lease obligations. This meant there was a very real risk of WeWork ending up with no tenants as well as no revenue.

The impact on London office prices

The recent IPO failure of WeWork has been having an impact on the overall rental structure of offices in London, regardless of valuation. Statistics show that 30% of leasing and vacancy rates had been affected by the dominance of WeWork when things were going well for the firm, but this artificially high, and now downfall of the firm will mean that experts strongly predict the overall rental prices to dramatically decline.

Co-working operators over-bidding rents

Analysts have warned that the trend for co-working firms to over-bid rents in order to benefit from longer rent-free periods was something that is problematic. As it leads to a triggering of London values being derated.

In addition, the co-working space business model that has been made popular by WeWork of having long-dated liabilities combined with short-dated income also poses a problem in the office space rental downturn.

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